India economic growth on recovery path from April 2017: Morgan Stanley

New Delhi: The impact of demonetisation will only be short-term and India's growth momentum is likely to get back on recovery path from April next year with support from consumption and exports, says a Morgan Stanley report.

According to the global financial services firm, the currency replacement programme is a roadblock in the short term and GDP growth for the quarters ending December and March is expected to slow down by around 50-75 bps.

The broad growth outlook of the country however, remains unchanged, it said.

"We maintain our overall constructive outlook on India. We expect growth to be back on the recovery track from 2Q17 after a short period of slowdown between November 2016 and March 2017, due to the currency replacement program," Morgan Stanley said in a research note.

The report expects consumption, which accounts for 60 per cent of GDP, to recover from the quarter ending June '17, and the recovery to broaden following the pick-up in public capex and FDI flows.

Moreover, as global growth is expected to accelerate to 3.4 percent in 2017 from 3 percent in 2016, following which India's exports is likely to support an overall recovery in 2017 after being a drag in 2016, the report noted.

On equity markets, the report said that the country will exit the low return environment of the past two years, thanks to better equity valuations.

"In our view, equities are likely to deliver 14 percent INR returns in 2017, compared with (-) 3 percent in 2015 and 2016," Morgan Stanley said.

Equity valuations relative to bonds are the best since 2013. India is one of our top emerging market picks, it added.

On RBI's policy stance, the report said that rising US rates mean that the RBI needs to maintain an adequate buffer on real rates and not cut rates aggressively in response to short-term weakness in growth arising from demonetisation.

Though in the base case, Morgan Stanley had expected one more rate cut of 25 bps in the current easing cycle, but indications in the December policy statement suggest that the Central Bank is not too concerned about the growth impact from the currency replacement program.

"Moreover, the rise in oil prices, US rates and stickiness in core inflation means that we appear to be nearing the end of the easing cycle," the report said.