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A combination of factors like wider opening, improving labour market and terms of trade for the rural sector will result in rural demand to rebound in India, said Morgan Stanley on Wednesday.

In a research report, Morgan Stanley also said the high-frequency data suggest that overall economic activity has been normalising over the past three months after remaining sluggish in the trailing 12 months.

According to the high-frequency data, the improvement has been led by a lower unemployment rate in rural areas, recovering two wheeler sales, increasing growth of credit to the agriculture sector, and early signs of stabilisation in terms of trade, the report said.

"Furthermore, government spending directed towards rural areas continues to track at 3.3 per cent of GDP (gross domestic product) vs. the pre-pandemic trend of 2.2 per cent of GDP," Morgan Stanley said.

According to the report, given the size of the Indian rural economy, a key area of focus for policymakers is accelerating rural incomes.

Policymakers are taking steps to diversify livelihoods in rural areas, improve access to basic amenities (which help reduce barriers to structural transformation), and improve productivity across the agriculture sector.

According to Morgan Stanley, the risks to the rebound in rural demand are: (a) slower than expected improvement in contact-intensive services growth, which will have negative spill overs for the informal/unorganized segment; (b) weaker than expected job creation, especially in the semi-skilled segment; and (c) higher commodity prices, which will increase non-food inflation and worsen terms of trade for the rural sector.