Mumbai, Jan 6 (IANS): Morgan Stanley expects India to be one of the best performing emerging markets in 2025, with a base case projection for Sensex to rise by 18 per cent by December end.

In its latest note, the US-headquartered investment bank sees 18 per cent base case upside for the BSE Sensex by the December end.

“India's macro stability is strong due to improving terms of trade and flexible inflation target,” said the global brokerage, forecasting earning of 18–20 per cent earning growth over the next four to five years.

Private capital expenditure cycle, re-leveraging of corporate balance sheets and unfolding of a structural rise in discretionary consumption are among reasons for this. A reliable source of domestic risk capital also contributes to the capital expenditure

Infrastructure spending, restructuring GST rates, direct tax reforms, more free trade agreements, and focus on energy transition are other areas that will contribute to India's macro stability, said Morgan Stanley in its note.

As far as interest rates are concerned, Morgan Stanley expects a shallow cycle of 50 basis points with the rate cuts starting from February. It expects two consecutive rate cuts of 25 bps each.

The Reserve Bank of India (RBI) is now committed to durable liquidity. Regulatory tightening may loosen in the weeks ahead, according to the brokerage. Initial issuance in the Indian markets is running at about 1.3 per cent of GDP versus the previous peak of over 3.5 per cent and set to rise further, Morgan Stanley said in the note.

The base case estimate also entails robust domestic growth, no recession in the US and benign oil prices. "We use a modest reduction in interest rates and positive liquidity environment as the base case for monetary policy. We do not anticipate a bunching of issuances, and the retail bid keeps its nose ahead of the supply," Morgan Stanley said.