The worst period of macro instability is possibly over, and both consumer inflation and trade deficit are expected to moderate albeit gradually, Morgan Stanley said.
"Global commodity prices were largely steady last month, with the exception of oil prices which continued to decline," Upasana Chachra, chief India economist at Morgan Stanley, said in the note on Wednesday.
"We believe the worst of macro instability is behind us now, though moderation in inflation and narrowing of India's trade deficit will be gradual."
The note pointed out that the indexes measuring global commodity prices, food prices and metal prices had stabilised in August and were down 9%-25% from their peak. Oil prices, meanwhile, had declined 8% month-on-month.
"These fuel-related global commodities constitute 13.2% of India's CPI (consumer price index) and 33.8% of the WPI (wholesale price index) basket," Chachra said. The rupee had also been relatively stable in August, she said.
Chachra reckons India's consumer inflation rate will rise to 7%-7.2% in August and remain at 7% in September before moderating gradually. The inflation rate has remained above the Reserve Bank of India's tolerance band for seven straight months.
The research house reckons India's trade deficitit likely peaked at $30 billion in July. The record trade deficit has prompted economists to revise India's current account deficit and balance of payments projections.
"We believe that lower commodity prices and a partial roll back of taxes on petroleum products will help improve the trade balance trend," Chachra said.