India’s economic outlook continues to be supported by strong domestic demand and improving high-frequency indicators, even as rising geopolitical tensions in the Middle East add a fresh layer of global uncertainty and raise the risk of stagflation, Morgan Stanley said in its recent report.The report said that “domestic demand remains resilient; however, headwinds are emerging as ongoing geopolitical tensions create a stagflationary risk,” adding that while macroeconomic stability indicators are currently favourable, “prolonged disruption poses downside risks to growth and could worsen macro stability.”Meanwhile, on domestic front, high-frequency indicators point to broad-based economic strength. The report highlighted an improvement in auto sales across segments, alongside rising credit growth, signalling sustained consumption and lending activity.It further pointed to resilient GST collections, reflecting steady economic activity. The manufacturing PMI has improved, while the services PMI has edged down, indicating some moderation in the services sector.Alongside, labour market conditions are improving in CY2025 and CYTD26, with a gradual rise in employee expenses among BSE-500 companies, indicating strengthening employment trends.Corporate performance has remained steady, with revenues holding up in the December 2025 quarter. The report also said that nominal growth is expected to improve in FY2027E.Financial flows continue to support economic activity. Monthly SIP flows remain upbeat, indicating sustained retail investor participation, while fund flows to the commercial sector remain healthy, pointing to adequate credit availability for businesses.On the policy side, the Reserve Bank of India has taken proactive steps to manage liquidity. The report noted that the RBI has conducted proactive liquidity management, with the policy rate currently at 5.25%, and interbank liquidity remaining in surplus, ensuring adequate system liquidity.However, the report also cautioned that India is still exposed to external risks, particularly due to developments in the Middle East. It noted that the country is vulnerable to volatility in global commodity prices, especially energy. At the same time, the region also remains crucial for India’s external sector, with exports to the region accounting for around 15% of total exports, while it contributes 38% of India’s remittances.
