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India to Be Among First With Asia Rate Cuts, Morgan Stanley Says

Inflation in the two countries has “returned to their comfort zones” and real, or inflation-adjusted, interest rates are relatively high, Morgan Stanley economists led by Chetan Ahya, wrote in a report.

The Reserve Bank of India, which aims to keep inflation within a 2%-6% range, has kept interest rates unchanged for four policy meetings now, while maintaining a relatively hawkish stance. Bank Indonesia on Thursday kept its key rate unchanged after a surprise hike last month.

The two central banks may have more scope to cut interest rates next year as the US Federal Reserve keeps policy on hold and bond yields in the world’s biggest economy likely eases, Morgan Stanley said. Emerging markets like India and Indonesia are reliant on foreign inflows because of their wide current account deficits, making their currencies more vulnerable to US rate moves.

“To be sure, these central banks will still want to preserve some real rate buffer, and so we see RBI and BI lowering policy rates by 50 basis points and 100 basis points, respectively, over 2024,” Morgan Stanley said.

India’s inflation slowed to 4.87% in October, nearing the 4% midpoint of the RBI’s band, while consumer prices in Indonesia rose 2.56%, remaining within the 2%-4% target range.

Several economists expect the RBI to cut interest rates from the second quarter, although Goldman Sachs Group Inc. is predicting a much later move, by the final quarter of next year.

Morgan Stanley predicted other central banks in Asia, such as South Korea and the Philippines, would be able to cut rates from August. Those that didn’t tighten as fast, such as Thailand and Malaysia, may show less urgency and opt for cuts in early 2025, it said.

Source : CNBC TV