Morgan Stanley has projected a shallow rate cut of 50 bps from June 2024 by the Reserve Bank of India even as it forecasts a slowdown in India’s GDP growth to 6.5% in FY25.
“On monetary policy, we build in a shallow rate cut cycle of 50bps from Jun-24, in our base case, even as we continue to remain watchful of risks from stronger-than-expected growth (strong credit growth), which could defer the rate easing cycle,” the brokerage said in a report.
“We expect GDP growth to remain healthy, and we are tracking QE Dec-23 at 6.5% YoY, even as it slows from 7.7% in H1F24. We expect GDP to average 6.9% YoY in F24 and 6.5% in F25,” it said.
Morgan Stanley anticipates headline inflation to remain range-bound around 5.0-5.2% YoY in 1Q24, supported by a favourable base effect, and an average 5.4% YoY in F24 and 4.5% in F25.
The current account deficit is likely to remain benign, supported by strength in services exports and softening global commodity prices, especially oil, and track at 1.2% of GDP in F24 and 1.3% of GDP in F25.
Domestic demand improved in January, while macro stability remains comfortable, reflecting strength in the fundamentals, it said, adding, “We maintain our constructive outlook on the economy. Risks emanate from global factors and elections in May 2024.”
Tracking policy
Interbank liquidity continues to remain in deficit in February (month to date), and is tracking at $2 1 billion, while the weighted average interbank call rate has moderated to close to repo rate at 6.5%. On the fiscal side, the 12-month trailing deficit rose a tad, to 5.8% of GDP in December from 5.7% of GDP in November. The FYTD fiscal deficit is tracking at ~55% of the F2024 budgeted target.
Macro indicators
Domestic demand gathered pace on a YoY basis in January, as it inched up to a 3-month high, and also accelerated on a sequential basis. GST collections rose to their second-highest, to Rs 1.7 lakh crore, growing 10.4% YoY, while Manufacturing PMI improved to 56.9, remaining expansionary since Jul-21. On the external demand front, exports grew 3.1% YoY in January from 1% in the previous month, the brokerage noted.
CPI inflation edged down to a 3-month low of 5.1% YoY in January from 5.7% in December, while core inflation, continued to remain benign, as it slowed further to 3.6%. WPI moderated to 0.3% YoY in January from 0.7% in the previous month.
Trade deficit narrowed to $ 17.5 billion in January from $19.8 billion in December. On a monthly annualised basis, the trade deficit moderated to 5.6% of GDP in January from 6.4% of GDP in December, while the trade deficit ex-oil and gold softened to 2.2% of GDP in January from 2.7% of GDP in the previous month, it said.
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