MUMBAI – Interest rate cuts in India are “off the table” in fiscal year 2024/25 given the change in the Federal Reserve’s policy path and strong growth in the South Asian nation, analysts at Morgan Stanley said on Tuesday.
“We believe that improving productivity growth, rising investment rate, and inflation tracking above the target of 4%, alongside a higher terminal Fed funds rate, warrant higher real rates,” economists Upasana Chachra and Bani Gambhir wrote.
With India’s key policy rate expected to be steady at 6.5% in the financial year ending March 31, real rates should average 200 basis points (bps), they added.
India’s rate-setting Monetary Policy Committee kept the key repo rate unchanged for a seventh straight meeting earlier this month after having raised it by a total of 250 basis points between May 2022 and February 2023.
The central bank seeks to ensure inflation aligns durably and sustainably to its 4% target.
India’s strong growth trend, driven by capex and productivity, implies interest rates could be higher for longer, Morgan Stanley said.
The investment bank expects the momentum of capital expenditure to pick up in a sustained manner, creating a “virtuous cycle of growth”.
Meanwhile, it expects a delayed start to the Fed’s easing cycle, with the first rate cut likely in July, and sees a total of 75 bps of U.S. rate cuts in 2024 and a shallower cycle next year.
A higher “terminal” Fed funds rates exposes the Indian economy to some degree of external risks as strength in the dollar could weigh on the rupee and increase risks of imported inflation, warranting a cautious monetary stance, Morgan Stanley said.
