“Don’t mistake reflation for its ugly step-sister, Asia’s policy rate normalisation is likely to be gradual,” a research by Morgan Stanley said Monday.
Even as the Covid second wave engulfs India and some other emerging economies, pushing the growth down but jacking up commodity and other prices, this shouldn’t be mistaken for inflation by the regulators, a Morgan Stanley research said.
“Despite higher commodity prices, we believe inflation would still stay in benign territory in Asia. The starting point for inflation is low, providing considerable runway for reflation. Demand-pull inflation is also unlikely to be significant because Asia is likely mostly still operating below potential. A productive policy mix also mitigates risks of bad inflation. Such benign macro stability and the Fed‘s dovish approach (expected tapering in April 2022and policy rate hike in 3Q23) mean that Asia’s policy rate normalisation is likely to be gradual and non-disruptive,” the research said.
The research said that the Covid-19 flare-ups in India may just be a “temporary bump and not a permanent roadblock.”
Covid-19 flare-ups in different parts of Asia and containment measures affect contact-intensive segments. Yet to the extent that Covid-19 improves in the second quarter of 2021, it is likely only a temporary speed bump in the growth path. Besides, vaccine rollout is under way and even if it’s slower than in developed markets, would nudge Asia towards recovery. Meanwhile, the spill over from India’s Covid situation to the rest of Asia – from risks to supply chains, vaccine supply, and foreign labour movement – still looks manageable. Export manufacturing in most parts has been allowed to continue in India and Asia’s vaccine supply is not overly dependent on India, the Morgan Stanley research added.
The research paper said that it remains positive for the future growth of emerging markets including India. Putting Goldilocks to the Test Optics may look less clear-cut – but the Goldilocks recovery still has legs. We remain positive, the research said.
Morgan Stanley had earlier said that India, Indonesia and the Philippines would look better placed in this Goldilocks environment, as they stand to benefit more from early vaccine availability and the Fed’s AIT (average inflation targeting) framework.
Goldilocks economy is often the one where the growth is high but the inflation is under control. That is the economy is in equilibrium or the best state possible: with good employment figures, economic stability and higher than world average growth.