Rate cuts in India are off the table in FY24-25, says Morgan Stanley
Rate cuts in India are “off the table” in the 2024/25 fiscal year given the change in Federal Reserve policy path and strong growth in the South Asian country, Morgan Stanley analysts said on Tuesday.
“We believe that improving productivity growth, rising investment rates and tracking inflation above the 4 percent target, in addition to higher Fed terminal interest rates, justify higher real interest rates,” wrote economists Upasana Chachra and Bani Gambhir .
With India’s key policy rate expected to remain stable at 6.5 percent in the financial year ending March 31, real interest rates should average 200 basis points (bps), she added.
India’s Monetary Policy Committee kept the key repo rate unchanged for the seventh consecutive time earlier this month, after raising it by a total of 250 basis points between May 2022 and February 2023.
The central bank aims to ensure that inflation remains in line with its target of 4 percent in a sustainable manner.
India’s strong growth trend, driven by investment and productivity, implies interest rates can stay higher for longer, Morgan Stanley said.
The investment bank expects capital spending momentum to pick up sustainably, creating a “virtuous growth cycle.”
In the meantime, she expects a delayed start to the Fed’s easing cycle, with the first rate cut likely in July. In 2024, US interest rate cuts will total 75 basis points and next year the cycle will be shallower.
A higher ‘end’ Fed Funds rate exposes the Indian economy to some degree of external risk as the strength of the dollar could weigh on the rupee and increase the risk of imported inflation, justifying cautious monetary policy , according to Morgan Stanley.
(Only the headline and image of this report may have been reworked by Business Standard staff; the rest of the content is automatically generated from a syndicated feed.)
First print: April 16, 2024 | 12:19 pm IST