Morgan Stanley sees the risk of an earlier start to the Reserve Bank of India’s rate-cutting cycle as the inflation outlook has improved. It had expected the Reserve Bank of India (RBI) to cut interest rates in the first quarter of 2024 but the brokerage firm now believes there is a possibility of the rate cut cycle taking place before December end of 2023.
“Growth conditions are evolving in line with our view of GDP growth at 6.2 percent in F24e. However, downside risks have emerged for our inflation estimate of 5.5 percent in F24, leading to a risk of a potentially earlier start to an RBI rate cut cycle vs. our base case of 1Q24,” said Upasana Chachra and Bani Gambhir of Morgan Stanley in a note.
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Morgan Stanley expects rates to be on hold in 2023 as inflation will remain below the 6 percent mark decisively.
The headline CPI print for March was in line with expectations but Morgan Stanley expects inflation to decelerate more decisively in the June quarter, to below 5 percent, supported by favourable base effect and moderating commodity prices, and sees downside risks to its forecast of inflation averaging 5.5 percent in 2024. While in its base case, Morgan Stanley expects a shallow rate cut cycle to start from the first quarter of 2024 but it sees risks of the same starting earlier based on an improving inflation outlook.
The monetary policy normalisation has led to rate hikes of 250 basis points and a significant tightening in liquidity balance.
Meanwhile, domestic demand stayed resilient. The high frequency data showed a sustained growth momentum while the incoming data for March remained largely steady on a sequential basis.
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GST collection for March came in at Rs 1.6 trillion as compared to Rs 1.49 trillion in February, growing 13 percent YoY against 12 percent in February. PMI manufacturing remained in the expansionary zone for the 21st consecutive month, and rose to 56.4 in March from 55.3 in February. Credit growth remains resilient, albeit off peaks.
Additionally, new private projects rise to an all-time high in the quarter ended March with a rise in capacity utilisation to 74.5 in the September quarter as compared to the long-term average capacity utilisation of 72. The residential real estate segment witnessed new launches at a record high on an absolute basis. Besides, even import growth is the lowest since December 2020.
On the other hand, consumption indicators such as automobile sales, services PMI and air passenger traffic moderated. External demand remained weak as goods exports continued to contract in March, while services exports continue to grow, albeit at a slower pace.
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