Morgan Stanley expects shallow repo rate cut from June policy meeting

New Delhi: Morgan Stanley expects the Reserve Bank of India to start cutting rates from June 2024, with both retail and wholesale inflation figures remaining at a manageable level.

The Monetary Policy Committee of the RBI in its February review meeting unanimously decided to keep the policy repo rate unchanged at 6.5 per cent, maintaining status quo for the sixth straight time. The repo rate is the rate of interest at which RBI lends to other banks.

The RBI typically conducts six bimonthly meetings in a financial year, where it deliberates interest rates, money supply, inflation outlook, and various macroeconomic indicators.

Investment banking major Morgan Stanley, in a report 'India Economics - Macro Indicators Chartbook: Strength in Growth, Stability in Macro-Fundamentals' penned by Upasana Chachra and Bani Gambhir said they build in a shallow rate cut cycle of 50 basis points from June 2024, in a base case scenario.

"...we continue to remain watchful of risks from stronger-than-expected growth (strong credit growth), which could defer the rate easing cycle," the report said.

Retail inflation edged down to a three-month low of 5.1 per cent year-on-year in January from 5.7 per cent in December.

Wholesale inflation moderated to 0.3 per cent year-on-year in January from 0.7 per cent in the previous month.

Retail inflation in India though, is in RBI's 2-6 per cent comfort level but is above the ideal 4 per cent scenario.

A considerable decline in inflation, and its potential for further decline may have prompted the central bank to put the brake on the key interest rate again. Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well.

Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

The Morgan Stanley report said they expect India's GDP to average 6.9 per cent year-on-year in 2023-24 and 6.5 per cent in 2024-25.