Morgan Stanley economists have projected that the Reserve Bank of India (RBI) is unlikely to implement any key interest rate cuts throughout the fiscal year 2024-25. This forecast comes amidst India's robust GDP growth and the recent decision by the US Federal Reserve to postpone its rate reduction, which poses potential risks to the Indian economy.

Factors influencing the decision

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According to economists Upasana Chachra and Bani Gambhir, several factors contribute to this projection. These include the country's improving productivity, rising investment rates, and inflation surpassing the 4 per cent target. Additionally, expectations of a higher terminal Fed funds rate justify maintaining higher real interest rates within the Indian economy.

External risks highlighted

Morgan Stanley's analysis also highlights potential external risks, particularly regarding the delayed commencement of the interest rate easing cycle by the US Federal Reserve. This delay could lead to a stronger dollar, thereby pressuring the Indian rupee and elevating the threat of imported inflation. Consequently, the investment bank advocates for a cautious approach to monetary policy.

Growth projections and policy outlook

Recent adjustments in growth forecasts further solidify Morgan Stanley's stance. The investment bank recently revised its GDP growth forecast for India to 6.8 per cent for the financial year 2024-25, up from the previous estimate of 6.5 per cent. Similarly, projections for the fiscal year 2023-24 have been revised upward to 7.9 per cent.

RBI's monetary policy review

In its most recent monetary policy review on April 5, the RBI opted to maintain the key policy rate at 6.5 per cent for the seventh consecutive time. This decision aligns with the central bank's objective of curbing inflation while ensuring stable economic growth.

RBI Governor's statement

RBI Governor Shaktikanta Das reiterated the central bank's commitment to a "withdrawal of accommodation" stance to control inflation. He emphasized the continued implementation of a disinflationary policy to steer the economy toward stable growth, acknowledging persistent concerns regarding food price inflation.

As India navigates through dynamic economic conditions, Morgan Stanley's insights shed light on the evolving monetary policy landscape and its implications for the country's economic trajectory.