Rate cuts ‘off the table’ in FY25: Morgan Stanley RUPEE FALLS 14 PAISE TO 83.57 AGAINST DOLLAR
RBI seeks to ensure inflation aligns durably & sustainably to its 4% target
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 Reserve Bank of India (RBI) 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.
MUMBAI: The rupee depreciated 14 paise to close at 83.57 (provisional) against the US dollar on Tuesday, weighed down by a negative trend in domestic equities and a strong greenback against major crosses overseas amid geopolitical tensions.
Forex traders said a weak appetite for riskier assets and recent foreign capital outflows also dragged down the local unit.
At the interbank foreign exchange market, the local unit opened at 83.51 and finally settled at 83.57 (provisional), registering a loss of 14 paise from its previous close. On Monday, the rupee declined 6 paise to settle at 83.44 against the US dollar.
According to Anuj Choudhary Research Analyst, Sharekhan by BNP Paribas, the 10-year US bond yields rose to 4.66, the highest since November 2023. Weak domestic markets and simmering geopolitical tensions too weighed on the rupee.