Inflation Down 3% in 14 Months, Yet Repo Rate Holds Firm: Loans Unlikely to See Reductions This Year, Notes Morgan Stanley

Morgan Stanley economists have suggested that India may not receive relief from high interest rates on personal, home, and vehicle loans this year. They believe that the Reserve Bank’s monetary policy for the fiscal year until March 2025 won’t include a reduction in the repo rate, which currently stands at 6.5%.

According to a report by American brokerage firm economists, food items and commodities like crude oil have become more expensive. Apart from this, the anticipation of increasing inflation in the United States may either delay or reduce the expected rate cuts. A lower repo rate could also deter foreign investment in India.

In Europe, the deflationary trend persists, with no rate cuts indicated. However, the European Central Bank (ECB) has not reduced interest rates for the fifth consecutive time, but it has given a clear indication that rate cuts may be imminent due to the continuous deflation in Europe.

Reasons for Rate Cuts

In March, retail inflation stood at 4.85%, surpassing the RBI’s target of 4%. Similarly, in the United States, inflation reached 3.5% in March, exceeding the Fed’s 2% target. 

Globally, prices of essential commodities like food and crude oil are on the rise. If the Fed cuts rates, it could trigger a reduction in interest rates in India as well.

The strengthening of the dollar remains a significant factor globally, influencing various economic decisions.