Morgan Stanley forecasts no rate cuts for India in 2024-25
What's the story
Morgan Stanley's team of analysts predicts that India is unlikely to lower its interest rates in the fiscal year 2024-25.
This forecast is shaped by the Federal Reserve's policy adjustments and robust economic growth in India.
Economists Upasana Chachra and Bani Gambhir stated, "We believe that improving productivity growth, rising investment rate, and inflation tracking above the target of 4%, alongside a higher terminal Fed funds rate, warrant higher real rates."
Policy continuity
Repo rate to remain unchanged, predicts Morgan Stanley
The primary policy rate in India is expected to stay at 6.5% for the financial year ending March 31, according to Morgan Stanley.
The firm anticipates real rates to average around 200 basis points (bps).
The Monetary Policy Committee of India has maintained the key repo rate unchanged for seven consecutive meetings after increasing it by a total of 250 basis points between May 2022 and February 2023.
Economic momentum
Robust growth trajectory may keep interest rates high
Morgan Stanley highlights that India's strong growth trajectory, fueled by capital expenditure and productivity, suggests that interest rates may remain high for an extended period.
The central bank's goal is to sustainably and consistently align inflation with its target of 4%.
Morgan Stanley also foresees a continuous rise in capital expenditure momentum, leading to a "virtuous cycle of growth."
Monetary policy
Delayed onset of Federal Reserve's easing cycle anticipated
Morgan Stanley predicts a delayed start to the Federal Reserve's cycle of easing monetary policy, with the first rate reduction likely occurring in July.
The investment bank forecasts a total of 75 bps of US rate cuts in 2024 and a less intense cycle in the following year.
A higher "terminal" Fed funds rate could expose the Indian economy to external risks, according to Morgan Stanley.