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Interest rate cuts unlikely in India for FY 2024-25: Morgan Stanley

Morgan Stanley analysts predict that interest rate cuts in India for fiscal year 2024/25 are unlikely due to shifts in the Federal Reserve's policy and strong domestic growth. They highlight factors such as rising productivity, increased investment rates, and inflation surpassing the 4% target as reasons for maintaining higher real interest rates

Interest rate cuts unlikely in India for FY 2024-25: Morgan Stanley
First Published Apr 16, 2024, 12:36 PM IST

Interest rate cuts in India for fiscal year 2024/25 are no longer being considered due to shifts in the Federal Reserve's policy direction and robust growth in the country, Morgan Stanley analysts have said. According to economists Upasana Chachra and Bani Gambhir, factors such as improving productivity, increased investment rates, and inflation exceeding the 4 per cent target, alongside expectations of a higher terminal Fed funds rate, justify higher real interest rates.

The key policy rate in India is anticipated to remain stable at 6.5% until the end of the fiscal year on March 31. Consequently, real interest rates are projected to average at 200 basis points. 

The Monetary Policy Committee of India has kept the repo rate unchanged for the seventh consecutive meeting, following a cumulative increase of 250 basis points between May 2022 and February 2023, aiming to sustainably align inflation with the 4% target.

Morgan Stanley suggests that India's robust growth trajectory, fueled by capital expenditure and productivity, indicates the possibility of prolonged higher interest rates. The investment bank anticipates a continuous upswing in capital expenditure, fostering a positive growth cycle.

Regarding the Federal Reserve's actions, Morgan Stanley predicts a delayed commencement of the easing cycle, with the first rate reduction expected in July. They foresee a total reduction of 75 basis points in U.S. rates in 2024, followed by a less steep cycle next year.

While acknowledging the potential benefits of a higher "terminal" Fed funds rate, Morgan Stanley also highlights the associated external risks for the Indian economy. A stronger dollar may put pressure on the rupee and elevate the threat of imported inflation, necessitating a cautious approach to monetary policy.

A couple of weeks ago, Morgan Stanley revised its GDP growth forecasts for fiscal year 2024-25 (FY25), increasing it to 6.8% from the previous estimate of 6.5%. Additionally, the firm adjusted its growth projection for the current fiscal year (FY24) to 7.9%.

The outlook for India's GDP growth remains strong, with an expected growth rate of approximately seven percent in the fourth quarter of FY24, ending in March 2024. This growth momentum is anticipated to be widespread, with narrowing gaps between rural-urban consumption and private-public capital expenditure in FY25.

Furthermore, Morgan Stanley predicts a favorable trajectory for inflation, with recent trends indicating a decline in headline inflation. Factors such as decreasing food inflation, along with a notable reduction in core inflation due to eased supply chains and subdued price pressures, are expected. The firm also anticipates a gradual easing cycle in monetary policy, propelled by sustained growth in industrial and capital expenditure activities.

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