The Reserve Bank of India (RBI) has held the repo rate steady at 6.5% for the seventh consecutive time, indicating that rate cuts are unlikely in the near future.
According to a report by Morgan Stanley titled ‘India Economics: Rate Cuts Are Now Off the Table’, economists Upasana Chachra and Bani Gambhir predict that the RBI will maintain current policy rates through 2024-2025. This decision is influenced by factors such as robust productivity growth, an increasing investment rate, persistent inflation above the 4% target, and higher interest rates in the US, all of which support the need for higher real interest rates in India.
Morgan Stanley anticipates that although inflation may moderate, it will remain above the RBI’s medium-term goal, necessitating continued focus on disinflation without rate reductions. The firm adjusted its earlier forecast, now expecting the policy rate to hold at 6.5% rather than initiating a cycle of rate cuts from the third quarter of 2024.
Real interest rates, calculated as the difference between the key interest rate and headline inflation, are expected to maintain an average similar to the 2003-2007 period at around 200 basis points. Any significant changes in domestic growth dynamics or inflation rates might prompt the RBI to consider easing rates, whereas escalating geopolitical tensions could push for a tighter monetary stance.
Meanwhile, Morgan Stanley’s Chief US Economist, Ellen Zentner, has revised her expectations for the Federal Reserve’s policy, predicting a more conservative approach to rate cuts in the US, starting in July 2024 with three rate cuts through 2025, totaling a reduction of 175 basis points.
In India, with inflation at 4.85% as of March, within the RBI’s comfort zone of 2-6% but above the optimal 4%, the RBI’s consistent rate at 6.5% since May 2022 reflects a strategic effort to manage inflation effectively. This approach is expected to continue, given the global economic context and the relative stability of the Indian inflation trajectory.
