Morgan Stanley predicts these 6 factors will haunt India's macro outlook

India has to watch out over the next 12 months.

According to Morgan Stanely, they believe the current macro backdrop warrants a reduction in the fiscal deficit with the support of cuts in revenue expenditure growth and subsidies. 

This would help improve macro stability, particularly CPI inflation and the current account deficit. Reduction in revenue deficit and augmentation of saving should help reduce interest rates further – yet Morgan Stanley believes that the government also needs to ensure that momentum in policy measures to accelerate investment growth also picks up to improve the growth outlook.

Here's more from Morgan Stanley:

In short, we will track Budget F2014 to better understand the government’s effort to improve the growth mix, macro stability and productivity growth.

We believe policy makers' decision to pursue the bad mix of growth (lower private investment and high fiscal deficit/rural wage growth) since the credit crisis was at the heart of most of the macro challenges facing India.

This has culminated in the macro stability risks of persistently high inflation, elevated current account and trade deficits, and a persistent gap between credit and deposit growth (and therefore a high loan-deposit ratio).

We believe that the key factors which will affect the macro outlook over the next 12 months are:

Domestic factors:

1) The government’s effort on fiscal deficit management;

2) Rural wage growth;

3) Policy reforms supporting the investment outlook;

External factors:

1) External demand;

2) Trend in capital flows;

3) Global crude oil prices.