RBI likely to leave rates unchanged in FY25, help maintain India's 'Goldilocks' environment: Morgan Stanley

Given the higher-than-targetted inflation in India, improving productivity growth alongside external factors, economists now expect the Reserve Bank of India to hold the rates steady and expect no easing in FY25.
A report by Morgan Stanley on Tuesday said that the RBI is likely to keep the policy rate steady at 6.5 per cent due to global factors such as higher commodity prices, delayed start or shallower easing from the Fed and a stronger dollar.

In addition, the decision also depends on domestic factors such as continued upside surprise in growth, driven by capex and productivity, implying higher equilibrium real rates.

The confluence of both these global and domestic factors warrants the RBI staying put, as per the report authored by economists Upasana Chachra and Bani Gambhir.

“An important support for growth expansion to be sustained is a well-calibrated policy response, which helps to maintain the Goldilocks environment with a healthy trend in growth, moderating inflation, and a manageable current account deficit,” the report says.

A Goldilocks scenario is one where the economy is not hot enough to give inflation a filip, but growing fast enough to evade a recessionary environment.

RBI’s rate-setting panel, the Monetary Policy Committee (MPC), this month kept the repo rate unchanged at 6.5 per cent for the sixth time in a row “to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.”

“As such, we now expect the policy rate to remain steady at 6.5 per cent, against our previous view of a shallow rate cut cycle from Q3 2024, implying that real rates track at 200 bps (similar to the average real rates of 190 bps during 2003-2007),” the report adds.

The government has announced an 11 per cent growth in capital expenditure (capex) to Rs 11.11 lakh crore for the current financial year as private investment picks up.

The government hiked capex by 37.5 per cent to Rs 10 lakh crore in 2023-24.

RBI’s MPC in the April meeting left its inflation forecast for this fiscal year unchanged at 4.5 per cent and hinted at inflation target being in sight.

The central bank sees inflation for Q1, Q2, Q3 and Q4 of this fiscal year at 4.9%, 3.8%, 4.6% and 4.5%, respectively.

Rating agency Crisil expects the rate cut cycle to start from mid-2024.