According to Morgan Stanley Investment Management, India's current account and trade deficits have witnessed dramatic improvement from the peak level in the quarter ended December 2012.
India's current account deficit narrowed to 0.1 per cent of GDP for the June quarter this year, from the peak of 6.8 per cent of GDP in the quarter ended December 2012. (Read more)
"In terms of outlook, considering low capacity utilisation in the manufacturing sector and a weak trend in private investment, we believe that over the next 6-9 months, the current account is likely to remain closer to balance levels," the report added.
"We believe that from second half of 2017, the current account could move back into the 1-2 per cent deficit range with gradual recovery in private investment."
Current account deficit, a key factor for assessing the country's external position, narrowed sharply to just $300 million, or 0.1 per cent of GDP, in the June quarter, driven by lower trade deficit on deeper import contraction.
As for growth, the report said, the macro environment has seen steady improvement in the past two years. However, the pace of growth recovery had been slower than anticipated.
"In the last six months, we have seen a broadening of the recovery with a pick-up in discretionary consumption. We believe that the recovery in this cycle will be led by domestic demand - consumption, public capex and foreign investment," the report added.
On prices, the report said inflation is expected to moderate gradually to 4.7 per cent by March 2017.
"We believe that these drivers of inflation will remain benign and the maximum disinflation attributable to these is behind us. We expect headline and core CPI to decelerate to around 4.7 per cent by March 2017, from the 5 per cent level currently," the report added.