"We are more constructive on inflation outlook and we expect the retail price index to decelerate to 4.75 percent by this December against the consensus estimate of 5.8 percent. We also expect growth momentum to pick up, but do not expect a rise in inflationary pressure," says Chetan Ahya of Morgan Stanley in a note.
    
He also notes that rural wage growth has come down to a nine-year low of 5.5 percent in January this year from a steep 20 percent in FY 2013.
    
Morgan Stanley draws optimism from a slew of favourable factors, which influence retail inflation trend, such as wage growth, fiscal policy, growth-mix, real interest rates and global commodity prices.

The last time inflation and growth moved in tandem was 2003-05, paving the way for near double digit growth before recession played spoilsport.
    
"Comparing the drivers of inflation between the two cycles we see that domestic factors are moving along similar lines as in the 2003-05 cycle and decline in global commodity prices are an added support in the current cycle," Ahya said.
    
Stating that sustained inflation deceleration will provide more room for more monetary easing, he forecast a sustainability lower inflation path of 5 percent to be achieved from April, and expects inflation to decelerate to 4.75 percent by December this year.
    
"Based on our expectation of the inflation trajectory, we believe the Reserve Bank could lower rates by a further 75-100 bps in 2015. Also we believe deposit rates are to decline significantly and more than policy rates."

Comparing the current inflation-growth cycle to the 2003-05 cycle and citing the present domestic and external macro environments, Ahya said, "like in the current period, the economy was in the early stage of recovery between 2003 and 2005.
    
In the previous cycle acceleration in growth was accompanied by significant improvement in productivity which kept inflation low and stable."
    
Citing parallels with FY 2003-05 period, he recalled that driven by heavy investment in infrastructure by government and a private sector capex spree, coupled with low inflation the country saw higher growth rates during FY 2003-05.
    
While growth scaled past 9 percent, and averaged at 7.9 percent, inflation remained stable and low averaging at 4 percent--with food inflation averaging 3.2 percentand non-food inflation averaging 4.5 percent.
    
This higher growth was driven by capex, which did not create excess inflationary pressure, said Ahya, adding growth accelerated from around 4.6 percent in FY 2002 to 9.2 percentin FY 2005 and capex as a percentage of GDP rose from 24.8 percent in FY 2003 to 34.7 percent in FY 2006, while CPI inflation remained range-bound.

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