Fuel Crisis May Hit Growth, but Domestic Demand to Cushion India's Economy: Morgan Stanley

India's Economic Growth to be Driven by Domestic Demand Amid External Uncertainty

A report by Morgan Stanley suggests that India's economic growth is likely to be increasingly driven by domestic demand as the country navigates fuel supply concerns, elevated commodity prices, and external uncertainty.

The report comes at a time when Prime Minister Narendra Modi has called for austerity and more responsible consumption amid rising energy security concerns. Morgan Stanley expects growth to hinge on domestic demand amid external uncertainty, noting that India is entering this phase from a position of macro stability. However, prolonged supply disruptions and elevated commodity prices are likely to erode stability.

Despite the challenging global backdrop, the brokerage said April activity indicators remain resilient, supported by strong domestic demand. Urban demand, government spending on infrastructure and defence, and services exports are expected to help cushion the impact of higher oil prices and supply disruptions. The economic impact of the current energy shock is expected to be most visible in the June quarter, with growth expected to trough in Q2 Jun-26, reflecting the impact of the conflict, and to gradually normalize to pre-conflict levels by Mar-27.

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Morgan Stanley now forecasts India's real GDP growth at 6.7% in FY27 and 7% in FY28, compared with an estimated 7.6% in FY26. On inflation, the brokerage warned that rising commodity costs and currency weakness could create fresh pressure, with headline CPI inflation expected to average 4.7% YoY in F2027, driven by higher production costs, INR weakness, and spillovers into core inflation.

The brokerage also flagged rising pressure on India's external balances, saying that higher oil prices could widen the current account deficit to 1.8% of GDP. On policy, Morgan Stanley expects the Reserve Bank of India to remain cautious, balancing growth and inflation risks from the supply shock.

Highlighting changes in energy consumption, Morgan Stanley said that elevated LNG prices and supply disruptions have triggered visible fuel-switching trends, increasing reliance on coal-based generation. Additionally, LPG consumption data show a 13% YoY decline in April for a second consecutive month. The brokerage expects oil prices to remain elevated in the near term, with its base case assuming crude peaks in the June quarter before gradually easing.

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