The Reserve Bank of India may have room to cut interest rates, but it’s unlikely to take an aggressive approach, according to Chetan Ahya, Chief Asia Economist at Morgan Stanley.”Considering that we are not expecting a big dent to India’s growth story, since growth conditions will still be reasonable, RBI should take up two more rate cuts,” Ahya told CNBC-TV18 from the sidelines of the Morgan Stanley India Investment Forum.
Morgan Stanley expects a sharp global growth slowdown due to the tariffs. US growth is projected to decline from 2.5% in 2024 to 1% in 2025, while Asia could see a dip from 4.6% to 4.3%. India’s growth is expected to ease from 6.7% in calendar year 2024 to 6.2% in calendar 2025.
Ahya also shared his outlook on inflation, interest rates, bond yields, and currency trends.These are edited excerpts of the interview.Q: India’s latest GDP numbers were stronger than expected. It beat our poll even on a full-year basis. Our poll said 6.3%, the number has come at 6.5%. Does that enthuse you a bit that India may do better than the 6.2% you have forecast for the current year?A: Yeah, I think it’s possible. The GDP numbers were a bit stronger, but if you look at it adjusted for the indirect tax effect, then the number was 6.8. So the underlying number was less robust than the headline number. But it’s definitely indicating that India is at least having a starting point before the tariff effect takes in, which is much stronger than everybody in the rest of the world as well.Q: So will the FY forecast have an upward bias? A: At his point of time, we are saying that the risks are balanced. From a global perspective, you have this tariff uncertainty. And our global team thinks that there are downside risks to that global view, which lends some downside risk to India numbers as well. But at the same time, the India-specific factors, i.e., that policy support has been great. The March number for both central and state government capex was extremely strong.So the starting point for India is from the policy support, such that you could have that downside risk being balanced by the domestic factors. So at this point of time, we are still maintaining our base case growth numbers for India.Q: You make a strong case that disinflation is likely to continue in Asia. Will that apply to India as well?A: Yeah, all the points that we’re thinking about for the region are applicable to India. The starting point of inflation is low, it’s actually below target. You have lower oil prices. You have this tariff effect, which is deflationary for emerging markets and Asia and India. And at the same time, you have the strength in the local currencies in the region, including INR. All of these factors mean that inflation is likely to remain below 4%, and that actually provides great comfort to the RBI to go ahead and take up rate cuts.Q: You have a 3.8% inflation for the full year and yet you say RBI will make only two more cuts. Why can’t they go more aggressive? If your expectation is that by Q4 we go as low as 3.6%, isn’t there space for more cuts?A: The framework that we are approaching this with is that you will have real interest rates in the ballpark of about 1.5%. And considering that we are not expecting a big dent to India’s growth story, since growth conditions will still be reasonable, RBI should take up two more rate cuts.
If we are seeing further downside to our growth numbers, then we are saying that there’s the possibility the RBI does 75 basis points instead of 50 basis points more. But anything more than that would really be dictated by the growth outcomes. They have to be much worse than what we are building in right now.Q: Okay, much worse, less than the 6.2% that you all are factoring in right now?A: That’s right.Q: We have been surprised by the kind of weakness in the dollar. Do we see DXY go back above 100 or will the dollar remain weaker?A: Our house view is that the dollar will remain weak. We are expecting another 9% odd depreciation in the DXY. Euro and yen are going to be appreciating strongly against the dollar. Emerging markets will see some upside, not as strong as euro and yen, but they will also see some upside.The driver for that thinking is essentially twofold: that tariff-related uncertainty plus the additional policy actions that the US has taken will slow US growth more. Just take the example of growth differentials between the US and Asia. The US will slow from 2.5% in the fourth quarter last year, on a year-on-year basis, to 1.1% by the fourth quarter of this year. Whereas Asia, in all, will slow by 90 basis points. So the US will slow by 150 basis points, Asia will slow by 90 basis points, and India will slow even less, by 50 basis points. So we are going to have that dynamic where growth differentials are moving back in favour of Asia and also the rest of the world.And then the other driver is that the US is running a relatively high fiscal deficit, which is in turn drawing a current account deficit of 4% of GDP. These are the main fundamental factors.And on top of it, there are some concerns related to the provision that they have made in the bill that has been passed in the House. It’s called Section 899 that is raising some concern in investors’ minds about potential taxing of income from investments in the US. So a whole lot of factors are at play, but net-net, we are expecting this weaker dollar trend to continue.Q: Actually, the Section 899 has not been discussed enough, probably because it impacts OECD countries more. But be that as it may, what is your US team telling you about US yields and the Fed action? Can they continue to have such an interest rate differential narrowing between India and the US?A: We are expecting the US 10-year bond yield to go down to 4% by the end of this year. And the assumption that we are making is that as US growth slows and job growth slows, the market will begin to price those rate cuts. We have a lot more of those in 2026, but the market gets ahead of that and starts to price it in from the back half of this year. And that’s how we are seeing the 10-year bond yield going down to 4%. So yes, there are concerns on the fiscal deficit, but to the extent to which private demand will slow, that will result in job numbers slowing, and then expectations that the Fed will cut rates.Q: There is one factor that is not getting discussed enough in terms of growth, and that is the way in which China is sitting over the rare earth magnets. A month ago Rajiv Bajaj and now Sudarshan Venu of TVS talked about the impact, and today the Society of Indian Automobile Manufacturers has written to the government saying that production can come to a standstill. Will this be an unexpected quarter in that area, which can impact our growth?A: That risk is there. But, there is a process that the China government has put out, and unfortunately, if the process is such that every country’s private institutions have to give some kind of an undertaking to indicate that this is not going to be used for defence, that process is a very time-consuming process if you want to deal with the whole world in an individual manner. So that time limit that is involved in processing those documents and requests is what is causing that delay.Q: How do you expect currencies to behave? A: We are expecting strength in the rupee as well. In fact, we are expecting a modest 2–3% appreciation across the region. But one of the main anchors for the region will be RMB. To the extent to which they have a deflation problem in China, there will be less appetite on the part of Chinese policymakers to resort to some meaningful appreciation, like what you’re seeing in euro and yen. And at the same time, tariffs are unfortunately going to hit China the most. So both those factors will mean that RMB will sort of constrain the overall region’s currency appreciation. It won’t be as strong as what you’re seeing in euro and yen.Q: Is this pain about to last for a year more? Because then the US midterm elections come in, and then low growth and high inflation could become election issues. So do you think there’s greater relief in FY26 for India and for Asia?A: We should see an improvement in growth trajectory for the back half of this financial year itself. Because we are seeing that tariff effects will be most acutely felt until the fourth quarter of this year, and then from the first half of calendar year next year, you should see improvement in growth across the world—but particularly out in India as well.
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