In a recent analysis by Morgan Stanley, economists Upasana Chachra and Bani Gambhir indicated that interest rate cuts in India for the fiscal year 2024/25 are now “off the table.” This assessment stems from a shift in the Federal Reserve’s policy trajectory and India’s robust economic growth.
Despite previous expectations of potential rate adjustments, Morgan Stanley’s analysts assert that factors such as improving productivity growth, a rising investment rate, and inflation tracking above the 4 percent target, alongside projections of a higher terminal Fed funds rate, argue for maintaining higher real rates.
India’s key policy rate, anticipated to remain at 6.5 percent throughout the financial year ending March 31, suggests that real rates could average around 200 basis points. The country’s Monetary Policy Committee recently opted to keep the key repo rate unchanged for a seventh consecutive meeting, following a series of rate hikes totaling 250 basis points between May 2022 and February 2023. The central bank’s objective is to ensure inflation aligns durably and sustainably with its 4 percent target.
Morgan Stanley points to India’s robust growth trajectory, fueled by capital expenditure and productivity, as a key factor in shaping the interest rate landscape. The investment bank anticipates a sustained uptick in capital expenditure, which could trigger a “virtuous cycle of growth” for the Indian economy.
However, the outlook is not without its external challenges. Morgan Stanley forecasts a delayed commencement of the Federal Reserve’s easing cycle, with the first rate cut likely in July. Additionally, the bank expects a total of 75 basis points of U.S. rate cuts in 2024, followed by a shallower cycle in the subsequent year.
The prospect of a higher “terminal” Fed funds rate presents certain external risks for the Indian economy. Strength in the dollar could exert pressure on the rupee and elevate the risk of imported inflation. Consequently, Morgan Stanley advocates for a cautious monetary stance to navigate these potential challenges effectively.
In summary, Morgan Stanley’s analysis suggests that interest rate cuts in India are unlikely for the fiscal year 2024/25. Instead, the focus remains on maintaining higher real rates to support India’s growth momentum and navigate external uncertainties posed by the Federal Reserve’s policy trajectory.
