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Business News/ Economy / RBI rate cuts now ‘off the table’ in FY25, says Morgan Stanley
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RBI rate cuts now ‘off the table’ in FY25, says Morgan Stanley

Morgan Stanley analysts predict no interest rate cuts by RBI in FY25 due to changes in the US Fed's policy path and strong domestic growth. Real rates are expected to average 200 bps, with the policy rate remaining steady at 6.5%.

RBI’s rate-setting Monetary Policy Committee kept the key repo rate unchanged for a seventh straight meeting on April 5.Premium
RBI’s rate-setting Monetary Policy Committee kept the key repo rate unchanged for a seventh straight meeting on April 5.

The Reserve Bank is unlikely to lower interest rates in the ongoing financial year, according to Morgan Stanley analysts, given India's robust economic growth and changes in the US Federal Reserve’s policy direction.

“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," Morgan Stanley economists Upasana Chachra and Bani Gambhir said in a note on Tuesday.

They now expect no easing in policy rates in FY25, predicting that RBI will continue to keep its policy rate steady at 6.5%, implying real rates to average at 200 basis points.

Also Read: Last-mile transmission a big hurdle to policy rate cut

On 5 April, RBI’s monetary policy committee kept the key repo rate unchanged for a seventh straight meeting. The central bank had raised the repo rate by a total of 250 bps to 6.5% between May 2022 and February 2023.

The US Federal Reserve's updated policy direction reflects a delayed start to the easing cycle, with the first rate cut in July 2024, from June previously, three cuts in 2024 (from four previously), and a shallower easing cycle with a cumulative 175 bps of easing versus 300 bps previously through 2025.

“Indeed, a higher terminal Fed funds rate with strength in the US dollar (DXY index has gained 4.5% year-to-date) would warrant a cautious stance from the RBI," Morgan Stanley economists said.

Also Read: RBI keeps eyes on inflation, finger on pause button

India's strong growth trend, driven by capital expenditure and productivity, imply that rates could be higher for longer, the analysts said. 

“We believe that the current cycle is similar to the 2003-07 cycle with pickup in capex and productivity. As such, real policy rates averaged 1.9 ppt over 2003-2007," they added.

While Morgan Stanley expects India’s domestic growth to remain robust and macro stability to remain benign, higher terminal Fed Funds rates expose the economy to some degree of external risks. Moreover, strength in the dollar could weigh more heavily on the rupee and increase the risks of imported inflation, warranting a cautious stance from RBI, according to Morgan Stanley.

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Published: 16 Apr 2024, 02:02 PM IST
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