No rate cuts for India in 2024/25, higher rates likely: Morgan Stanley

RBI rate cut: Morgan Stanley has thrown cold water on expectations of interest rate cuts in India for the current fiscal year (2024/25). The global investment banking major has cited the Federal Reserve's revised policy path, potentially including a delayed and shallower rate cut cycle, as a key influence.

India's robust economic growth, fuelled by capital expenditure and productivity gains, suggests the need for a tighter monetary policy stance. The Reserve Bank of India (RBI) remains focused on keeping inflation anchored around its 4 per cent target.

Higher real rates anticipated

Morgan Stanley economists Upasana Chachra and Bani Gambhir believe higher real interest rates are warranted in India. They forecast an average real rate of 200 basis points (bps) for the current fiscal year, assuming the key repo rate remains unchanged at 6.5 per cent.

RBI's rate stance

The Monetary Policy Committee (MPC) held rates steady at its last meeting in April 2024, following a series of hikes totaling 250 bps between May 2022 and February 2023. This policy decision reflects the RBI's commitment to inflation control.

Sustained growth and investment

Morgan Stanley expects capital expenditure (capex) to display sustained momentum, leading to a virtuous cycle of economic growth. This robust economic trajectory further strengthens the case for higher interest rates.

While Morgan Stanley anticipates a delayed start to the US rate cut cycle, with the first reduction potentially happening in July 2024, a higher "terminal" Fed funds rate still poses external risks for India. A stronger Dollar could put pressure on the Rupee and exacerbate imported inflation, necessitating a cautious monetary approach from the RBI.

(With Reuters inputs.)