Morgan Stanley India economists don’t expect RBI to ease policy rates in 2024-2025. This is driven by change in the US Fed rate path and an improving domestic growth trend, both warranting higher neutral real rates.

In a note “Rate cuts are now off the table”, Morgan Stanley India’s Chief Economist Upasana Chachra and Economist Bani Gambhir noted that the aforementioned factors warrant higher real rates.

“As such, we now expect no easing in policy rates in 2024-2025 with policy rate steady at 6.5 per cent, implying real rates to average 200 basis points,” they said.

For their assessment of India’s rate trajectory, Chachra and Gambhir referred to Morgan Stanley’s Chief US Economist, Ellen Zentner’s recent update to her outlook for the Fed policy path, which reflects stronger growth amid volatile inflation data.

Zentner’s updated Fed path 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 (vs. 300 bps previously) through 2025.

“While we expect India’s domestic growth to remain robust and macro stability to remain benign, a higher terminal Fed Funds rate does expose the economy to some degree of external risks.

Indeed, with stronger than expected US CPI data, market pricing for the Fed Funds rate reflects approximately two rate cuts in 2024 and the DXY index has gained approximately 4.5 per cent YTD (year-to-date),” Chachra and Gambhir said.

Against this backdrop, strength in the dollar could weigh on the currency and increase risks of imported inflation, warranting a cautious stance from the RBI, they added.

Chachra and Gambhir emphasised that the confluence of both global and domestic factors warrants the RBI staying put.

“As such, we now expect the policy rate to remain steady at 6.5 per cent, vs. our previous view of a shallow rate cut cycle from 3Q (October-December) 24, implying that real rates track at 200 bps (similar to the average real rates of 190 bps during 2003-2007),” they said.