Morgan Stanley says interest rate cuts will be 'off the table' in India in FY 2024-25.
India's interest rate cuts for FY 2024/25 unlikely due to Fed policy shift & robust growth. Real rates to stay high, Morgan Stanley says.
According to analysts at Morgan Stanley, interest rate reductions in India for the fiscal year 2024/25 are not on the agenda, given the shift in the Federal Reserve's policy trajectory and robust growth in the South Asian nation.
In a statement on Tuesday, economists Upasana Chachra and Bani Gambhir emphasized that factors such as improving productivity growth, increasing investment rates, and inflation surpassing the 4% target, alongside expectations of a higher terminal Fed funds rate, justify the need for higher real rates. They anticipate that India's primary policy rate will remain steady at 6.5% for the financial year ending March 31, resulting in average real rates of 200 basis points.
The Monetary Policy Committee, responsible for rate-setting, maintained the key repo rate unchanged for the seventh consecutive meeting earlier this month, following a cumulative increase of 250 basis points between May 2022 and February 2023.
The central bank aims to ensure inflation consistently aligns with its 4 %target. Morgan Stanley highlighted India's strong growth trajectory propelled by capital expenditure and productivity, suggesting that interest rates may remain elevated for an extended period. The investment bank anticipates a sustained uptick in capital expenditure, fostering a positive growth cycle.
Concurrently, it anticipates a delayed commencement of the Fed's easing cycle, with the first-rate cut likely in July, projecting a total of 75 basis points of U.S. rate cuts in 2024 and a milder cycle next year. The prospect of a higher "terminal" Fed funds rate introduces some external risks to the Indian economy, as dollar strength may exert pressure on the rupee and elevate the threat of imported inflation. Consequently, Morgan Stanley advocates for a cautious monetary stance.
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