New Delhi [India], April 17 : Morgan Stanley recent report titled "India Economics: Rate Cuts Are Now Off the Table," analyses the factors which have influenced RBI's policy decisions and the broader economic outlook for India.
The report says productivity driven growth will contribute to a favourable outlook for India. With inflation projected at 4.5 per cent in the next fiscal and current account deficit forecasted to remain below 1.5 per cent of GDP during the same period.
One of the key determinants shaping Morgan Stanley's revised stance on India's interest rates is the evolving trajectory of the US Federal Reserve's policy. The policy rate is expected to remain steady at 6.5 per cent in 2024-2025, implying an average real rate of 200 basis points.
According to Ellen Zentner, Chief US Economist at Morgan Stanley, the Fed's updated outlook reflects stronger growth amidst volatile inflation data.
The revised Fed path anticipates a delayed start to the easing cycle, with the first rate cut now expected in July 2024, as against the previous projection of June.
Furthermore, the number of rate cuts for 2024 has been reduced to three from four, with a shallower easing cycle amounting to a cumulative 175 basis points of easing through 2025, down from the previous estimate of 300 basis points.
Morgan Stanley's assessment underscores the robust growth trend witnessed domestically, driven by increased capital expenditure (capex) and enhanced productivity.
The sustained momentum in capex and industrial activity, coupled with an acceleration in credit growth, reflects a positive economic outlook for India
Drawing parallels to the 2003-2007 cycle, the current phase is characterized by a pickup in capex and productivity, resulting in higher real policy rates averaging 1.9 percentage points over the mentioned period.
Amidst the prevailing economic dynamics, Morgan Stanley anticipates macroeconomic stability to remain benign.
Based on the analysis of improving productivity growth, rising investment rates, and inflation trends, Morgan Stanley concludes that the conditions no longer warrant rate cuts.
While the report highlights the rationale behind the shift in policy stance, it also acknowledges potential risks. Weaker-than-anticipated growth trends or a faster-than-expected moderation in inflation could prompt the RBI to reconsider its stance.
Additionally, geopolitical tensions or sustained increases in commodity prices could lead to a more hawkish stance. However, Morgan Stanley underscores that any decision to hike rates would require a higher threshold.