In a dynamic global economic environment, attention turns toward India, as interest rate decisions by the Reserve Bank of India (RBI) become a focal point for analysts and investors. Discarding expectations of interest rate cuts, India is anticipated to maintain its current monetary policy stance throughout the fiscal year 2024/25. Renowned financial services firm Morgan Stanley has highlighted several key factors influencing this outlook, notably the shift in the U.S. Federal Reserve’s policy and India’s robust economic performance.
A team of Morgan Stanley economists, Upasana Chachra and Bani Gambhir, shared their insights on Tuesday, emphasizing that the combination of improving productivity growth, a climbing investment rate, and inflation levels hovering above the target rate of 4%, necessitates higher real rates in the country. The economists project that the key policy rate, which stands at 6.5%, will be maintained through to the end of the financial year on March 31. Consequently, the real rates should average around 200 basis points (bps) above the nominal rate.
In recent monetary policy decisions, the RBI’s rate-setting Monetary Policy Committee has consistently held the key repo rate steady, marking the seventh consecutive meeting without a change in early March. This follows a cumulative hike of 250 basis points between May 2022 and February 2023, as the central bank’s strategy has been to align inflation sustainably with its 4% target. The RBI’s unyielding approach underscores its dedication to fostering a stable economic environment in light of the inflationary pressures experienced globally.
Morgan Stanley remains bullish on India’s economic growth trajectory, fueled by capital expenditures (capex) and gains in productivity. These factors contribute to what the investment bank refers to as a “virtuous cycle of growth.” In this cycle, consistent increases in capital expenditure bolster the economy, driving robust expansion and reinforcing further investment. The momentum from such capital expenditure is expected to strengthen in a manner that sustains economic growth over time.
Turning to the international context, Morgan Stanley’s analysts have envisioned a delayed commencement for the Fed’s easing cycle, with the initial rate cut likely not before July. Their forecast includes a total of 75 basis points of rate cuts in the U.S. throughout 2024, followed by a shallower cutting cycle the following year. This is significant for India as the Fed’s policy decisions have a profound impact on global financial conditions, including those in India.
Notably, the prospect of higher terminal Fed funds rates introduces an element of vulnerability for the Indian economy. A strong dollar could potentially put downward pressure on the Indian rupee, complicating the battle against imported inflation. As a result, these external risk factors warrant a prudent and cautious monetary stance from India’s central bank, according to Morgan Stanley. The firm’s perspective aligns with the RBI’s conservative policy bias as it seeks to maintain macroeconomic stability in the face of global headwinds.
In conclusion, India’s economic landscape is proving resilient, supported by strategic policy oversight and favorable internal dynamics. However, the intertwining of domestic policy and international economic currents continues to challenge policymakers. As fiscal year 2024/25 approaches, eyes will remain on the RBI as it navigates these complexities, with market watchers now aligned with Morgan Stanley’s prognostication that interest rate cuts are, indeed, “off the table.”
