Morgan Stanley analysts have indicated that interest rate cuts in India are unlikely for the fiscal year 2024-25, citing various factors such as changes in the Federal Reserve’s policy path and robust growth in the South Asian nation. Let’s delve into their assessment and the reasons behind their conclusion.
Factors Influencing the Decision
Morgan Stanley economists Upasana Chachra and Bani Gambhir believe that the change in the Federal Reserve’s policy path has significant implications for India’s interest rates. They argue that the anticipation of a higher terminal Fed funds rate makes interest rate cuts in India less feasible.The analysts point out the strong growth trajectory of India’s economy, driven by factors like capital expenditure (capex) and productivity. This robust growth trend suggests that interest rates in India may need to remain elevated to support continued economic expansion.
Implications for India
With India’s key policy rate expected to remain steady at 6.5 percent, Morgan Stanley predicts that real rates should average around 200 basis points. This stability in policy rates reflects the Reserve Bank of India’s (RBI) commitment to ensuring inflation aligns with its 4 percent target.
Monetary Policy Caution
While acknowledging India’s strong growth prospects, Morgan Stanley highlights the need for a cautious monetary stance. The potential impact of external factors, such as fluctuations in the dollar-rupee exchange rate and imported inflation risks, necessitates prudence in monetary policy decisions.
Expectations Regarding Fed’s Easing Cycle: Morgan Stanley anticipates a delayed start to the Federal Reserve’s easing cycle, with the first rate cut likely in July. They project a total of 75 basis points of rate cuts in 2024 and a shallower cycle in the following year.
Morgan Stanley’s analysis suggests that interest rate cuts in India are unlikely for the fiscal year 2024-25. Factors such as the Federal Reserve’s policy trajectory and India’s strong economic growth underpin this assessment. However, the need for a cautious monetary policy approach remains paramount to navigate potential external risks and sustain India’s growth momentum.
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