M

April 15, 2024 11:00 PM GMT

India Economics | Asia Pacific Morgan Stanley India Company Private Limited
Idea

Upasana Chachra
Chief India Economist

Rate Cuts Are Now Off the Upasana.Chachra@morganstanley.com

Bani Gambhir
+91 22 6118-2246

Economist

Table Bani.Gambhir@morganstanley.com +91 22 6118-3027

We update our policy rate path and now expect no easing in our Exhibit 1 : Tracking Trend in Real Policy Rates
forecast horizon. This is driven by change in the US Fed rate path
and domestically strong growth, both warranting higher neutral
real rates.
Delayed and shallower US Fed rate easing cycle: Our Chief US Economist, Ellen
Zentner, has updated her outlook for the Fed policy path, reflecting stronger growth
amid volatile inflation data. Her updated Fed path reflects a delayed start to the
easing cycle, with the first rate cut in July 2024 (from June previously), three cuts in
Source: CEIC, RBI, Morgan Stanley Research , Morgan Stanley Research
2024 (from four previously), and a shallower easing cycle with a cumulative 175bps Estimates
of easing (vs. 300bps previously) through 2025. Indeed, a higher terminal Fed funds
rate with strength in the US dollar (DXY index has gained 4.5% YTD) would warrant
a cautious stance from the RBI.
Exhibit 2 : Tracking Policy Rate Paths for
Strong growth trend domestically, driven by capex and productivity, implies that India and US
rates could be higher for longer: The growth trend has been surprising on the Policy Rates, %
7 India US 6.5
upside over the last four quarters, with sustained momentum in capex and industrial 6
New
Old

activity. Further, leverage pickup is accelerating, as reflected in higher credit growth 5

tracking at a robust 16.3% in March 2024 vs. pre-pandemic growth of 7.1% YoY. We 4 3.625
New

believe that the current cycle is similar to the 2003-07 cycle with pickup in capex 3

Old
2
and productivity. As such, real policy rates averaged 1.9ppt over 2003-2007.
1

Macro stability expected to be benign: Productivity-driven growth helps to keep 0

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23

Jun-24

Jun-25
Mar-18

Sep-18

Mar-19
Dec-18

Sep-19

Mar-20
Dec-19

Sep-20
Dec-20
Mar-21

Sep-21
Dec-21
Mar-22

Sep-22

Mar-23
Dec-22

Sep-23
Dec-23
Mar-24

Sep-24
Dec-24
Mar-25

Sep-25
Dec-25
the macro stability outlook benign. We expect inflation to track at 4.5% in F25-F26e
with the current account deficit below 1.5% of GDP in F25-26e. Key risks to the Source: Bloomberg, Morgan Stanley Research , Morgan Stanley Research
Estimates
benign macro stability outlook stem from supply-side-driven shocks to food prices
and/or global commodity prices (especially oil).

Rate cuts off the table: We believe that improving productivity growth, rising
investment rate, and inflation tracking above the target of 4%, alongside a higher
terminal Fed funds rate, warrant higher real rates. As such, we now expect no easing
in policy rates in 2024-2025 with policy rate steady at 6.5%, implying real rates to
average 200bps.

What are the risks? In our view, risks stem from a weaker-than-anticipated trend in
growth or faster-than-expected moderation in the inflation trajectory, either of
which may prompt the RBI to embark on a rate easing cycle. On the other hand,
escalated geopolitical tensions and/or supply-side-driven sustained increase in
commodity prices (especially oil), leading to a deterioration in macro stability
indicators, would warrant a more hawkish stance. However, the bar for any rate
hikes will be high.

For important disclosures, refer to the Disclosure Section,

located at the end of this report.
M
Idea

Drivers of Change in Monetary Policy Outlook

We update our policy rate path and now expect no easing in our forecast horizon.
This is driven by change in the US Fed rate path and an improving domestic growth
trend, both warranting higher neutral real rates.

#1 – Delayed start and shallower US easing cycle

Deferred start to rate cuts; higher terminal rate: Per US Economics: Outlook Update:
Near-Term Inflation Against a Positive Supply Shock (14 Apr 2024), our Chief US
economist, Ellen Zentner, has revised her outlook for the Fed's policy path. She expects
three 25bp cuts this year, starting in July, and an additional four cuts in 2025. In her view,
the Fed is likely to pause in September 2024 and thereafter cut rates successively in each
meeting till June 2025. As such, the target range of the Federal Funds rate is 4.50%-4.75%
for 2024 and 3.50%-3.75% for 2025. This is in contrast to the previous view of 100bps
rate cut in 2024, followed by 200bps in 2025.

US growth to remain resilient; inflation to moderate gradually: Our team highlights

that the US economy is experiencing a positive supply-side shock, which allows for a larger
economy without adding inflationary pressures. The team upgraded its GDP growth
forecast 0.7ppt, to 2.3% 4Q/4Q this year, and 0.7ppt, to 2.1% in 2025. On a YoY basis, GDP
growth is expected at 2.8% in 2024 (vs. 2.6% previously) and 2.1% in 2025 (vs. 1.5%
previously). While inflation has moderated significantly from its peaks, the last three
months have shown volatility, masking signs of decisive softening. As such, by the July
FOMC meeting, three additional inflation prints will have been released, suggesting a
decelerating inflation trajectory and thus allowing the Fed to embark on a rate easing
cycle.

Fed to remain watchful of evolving macroeconomic trends: The Fed is likely to remain
data-dependent and may look to cautiously evaluate the trends within growth and
inflation. Immigration is likely to lead to transient, albeit faster, potential GDP growth, and
to that extent lead to a higher natural rate of unemployment as new labour supply takes
time to get absorbed. Therefore, as unemployment rises, policymakers will likely debate
whether it points to recession risks or is more a function of the new labour supply, which
increases labour market slack.

Implications for India: While we expect India’s domestic growth to remain robust and
macro stability to remain benign (discussed in the following sections), a higher terminal
Fed Funds rates does expose the economy to some degree of external risks. Indeed, with
stronger than expected US CPI data, market pricing for the Fed Funds rate reflects
approximately two rate cuts in 2024 and the DXY index has gained approximately 4.5%
YTD. Against this backdrop, strength in the dollar could weigh on the currency and
increase risks of imported inflation, warranting a cautious stance from the RBI.

2
M
Idea

Exhibit 3: US GDP, YoY% Exhibit 4: US CPI, YoY%

GDP, YoY% CPI, YoY%
4.9 Mse
5.0 4.0 3.8 3.8
3.6
4.5 3.4
3.5
4.0 3.0
3.4 3.0 2.7
3.5 Mse
2.4
2.5
3.0 2.2 2.2 2.2
2.4 2.4 2.0
2.5 2.2 2.3 2.2 2.0 1.8
2.1 2.1 2.1 2.1 2.1
2.0
1.5
1.5
1.0
1.0
0.5
0.5

0.0 0.0

Jun-23

Jun-24

Jun-25
Mar-23

Mar-24

Dec-25

Mar-23

Mar-24

Mar-25
Dec-23

Dec-24

Mar-25

Sep-25

Dec-23

Dec-24

Dec-25
Jun-23

Sep-23

Jun-24

Sep-24

Jun-25

Sep-23

Sep-24

Sep-25
Source: MS US Economics team, Morgan Stanley Research Source: MS US Economics team, Morgan Stanley Research

Exhibit 5: Real Policy Rates for India and US, 3MMA Exhibit 6: Fed Funds Rate, Market Pricing vs. Morgan Stanley
Estimate
Real Policy Rates, 3MMA Mse

4.0 Fed Funds Rate, %

2.0 6
2.0
0.0 5 4.4
0.0
4
-2.0 3.63
-2.0
-4.0 3 Actuals
Current Market Pricing
-6.0 -4.0 2
Mse
India US
-8.0 1
-6.0
-10.0
0
Jun-21

Jun-22

Jun-23

Jun-24

Jun-25
Feb-21

Dec-21

Dec-22

Dec-23

Dec-24
Aug-21

Feb-22

Feb-25

Dec-25
Oct-21

Aug-22

Feb-23
Oct-22

Aug-23

Feb-24
Oct-23

Aug-24
Oct-24

Aug-25
Oct-25
Apr-21

Apr-22

Apr-23

Apr-24

Apr-25
-12.0 -8.0
Dec-14

Dec-23
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13

Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22

Dec-24
Dec-25

Source: Bloomberg, Morgan Stanley Research, Morgan Stanley Research Estimates

Source: CEIC, Haver Analytics, Morgan Stanley Research , Morgan Stanley Research Estimates

Exhibit 7: India less US Real Policy Rates, 3MMA Exhibit 8: DXY vs. USD/INR
122
Mse DXY US$/INR
India-US Real Policy Rates, 3MMA
6 119 Indexed to Jan-22=100

116
4
113 Dollar Strength,
2 Rupee Weakness
110
0 107

-2 104

101
-4
98
-6
95
Jan-22

Mar-22

Jan-23

Jan-24
Jun-22
Jul-22

Mar-23

Jun-23
Jul-23

Mar-24
Feb-22

Feb-23

Feb-24
Aug-22
Sep-22

Nov-22
Dec-22

Aug-23
Sep-23

Nov-23
Dec-23
Apr-22
May-22

Oct-22

Apr-23
May-23

Oct-23

Apr-24

-8

-10
Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23

Dec-24

Dec-25

Source: Bloomberg, Morgan Stanley Research

Source: CEIC, Haver Analytics, Morgan Stanley Research, Morgan Stanley Research Estimates

Morgan Stanley Research 3

M
Idea

#2 – Domestic "Goldilocks" macro environment

a) Sustained strength in growth

Growth has surprised on the upside: GDP has continued to surprise on the upside for
four consecutive quarters, suggesting inherent strength in the economy, as a result of
which growth has galloped above expectations. Indeed, F22-24 growth is likely to average
at ~8.2% YoY (building in 7.9% for F24 per our estimate), buttressed by sustained growth
momentum in industrial and capex activity. We expect GDP growth to normalise and track
at a healthy 6.8% in F25e and 6.5% in F26e.

Leverage pickup is another sign of strength in growth: Credit growth has accelerated
and is tracking at a robust pace of 16.3% YoY as of March 2024 compared to 7.1% in
December 2019 (pre-pandemic). Further, the ratio of credit to GDP has risen to 53.8% in
F2024 from 49.7% pre-pandemic. While rise in credit growth has been driven by pickup in
retail credit, which is tracking at 18% (vs. 16.5% pre-pandemic), industry credit too has
picked up, growing by 8.2% vs. 2.5% pre-pandemic.

Capex has led the recovery… This cycle, like the 2003-07 one, has been marked by a
pickup in capex. Indeed, capex (real GFCF) growth has averaged 8.5% since June 2022,
with growth at a double-digit level of 10.6% in QE December 2023 vs. the pre-pandemic
(2017-19) average of 7.3%. The ratio of capex to GDP has recovered from the trough of
26.5% in December 2020 to roughly 31% as of QE December 2023 (four-quarter trailing).

…as reflected in improving productivity dynamics: Further, improving productivity is

also reflected by improvement in the ICOR (incremental capital output ratio), which is
currently tracking at 4.1 vs. 4.9 in the previous decade and similar to the average of 4.1
between 2003-2007.

Capex recovery to be sustained and set the stage for a virtuous cycle of growth: A
confluence of factors has contributed to improving productivity levels and consequently
ushered in a new capex cycle:

• Favourable structural policy measures (lower corporate tax rates, PLI schemes);
• Transition to a multipolar world, with companies looking to diversify incremental
production;
• Upturn in capacity utilisation rates; and
• Cleaner corporate/banking sector balance sheets.

We expect the capex recovery to become broad-based with private capex to lead the next
leg of recovery. Anecdotal evidence suggests nascent signs of a pickup in corporate capex,
reflecting new investment announcements made recently, with approval for three
semiconductor chip manufacturing plants entailing an investment of US$15bn and the new
approved EV policy that could trigger investments in electric vehicles.

In this context, we expect the momentum in capex to pick up in a sustained manner,

creating a virtuous cycle of growth. We thus expect the capex ratio to rise to 36.2% in F27
from 32.2% in F23, with a broad-based pickup, even as we expect private capex to drive
the highest delta. See India Economics: Capex Monitor: Tracking Macro & Micro Indicators
(#12) (8 Apr 2024).

4
M
Idea

As such, the constructive outlook for the economy – especially over the medium term – is
predicated on a pickup in capex. A confluence of positive factors – favourable
demographics, policy reform measures, and external forces – has created an opportunity
to accelerate the economic growth trajectory through creation of productive job
opportunities, fostering the virtuous cycle of higher income → higher saving → higher
investment → higher job creation → higher income.

Exhibit 9: Realised Trend in Real GDP Exhibit 10: We Expect GDP Growth to Track at 6.8% YoY in
F2025 and 6.5% in F2026
125 Real GDP, SA Indexed 4Q19 = 100
120 Realised Trend Pre-Pandemic Trend Real GDP Growth, YoY%
12%
115 9.8%
10% 8.3%
7.4% 8.0% 6.8% 6.5% 7.0%
7.9%
6.8% 6.5%
110 8% 6.4%
5.5%
6% 3.9%
105 4%
100 2%
0%
95 -2%
-4%
90
-6%
-5.8%
85 -8%

F2024E

F2025E

F2026E
F2013

F2014

F2015

F2016

F2017

F2018

F2019

F2020

F2021

F2022

F2023
80

75
Mar-20

Mar-21

Mar-22

Mar-23
Dec-21

Dec-22
Dec-19

Jun-20

Sep-20

Dec-20

Jun-21

Sep-21

Jun-22

Sep-22

Jun-23

Sep-23

Dec-23

Source: CEIC, Morgan Stanley Research, Morgan Stanley Research Estimates

Source: CEIC, Morgan Stanley Research

Exhibit 11: PFCE vs. GFCF, YoY% Exhibit 12: ICOR vs. TFP, 2YMA
20 15 6%
PFCE, YoY% GFCF, YoY% ICOR, 2YMA
4q trailing 13 TFP, 2YMA (RS)
15
4%
11
10
9 2%
5
7
Capex growth Capex
0%
0 led the cycle, with recovery 5
eventually broad-based Growth in consumption leading,
strength in consumption and capex remained consumption 3 -2%
-5 and capex between F04- momentum
subdued
08 expected to
improve
1
-10 Lower Value of ICOR and Higher -4%
Value of TFP Shows Better
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23

-1
Productivity
-3 -6%
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Source: CEIC, Morgan Stanley Research

Source: CEIC, Haver Analytics, Morgan Stanley Research

Morgan Stanley Research 5

M
Idea

Exhibit 13: Capacity Utilisation Tracking above Long-term Exhibit 14: Credit Growth Remains Robust
Average Levels Industry Credit 22%
15% Non-food Credit
88 Capacity Utilisation Capacity Utilisation, SA Personal Loans, RS 20%

84 11% YoY% 3MMA 18%

80
16%
76 7%
72 14%
68 Long term average: 71.7 3%
12%
64
-1%
60 10%
56
-5% 8%
52

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Feb-22

Feb-23

Feb-24
Aug-17

Aug-21
Aug-16

Aug-18

Aug-19

Aug-20

Aug-22

Aug-23
48
44
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13

Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Dec-13

Jun-21
Dec-21
Jun-22
Dec-22
Jun-23
Dec-23
Source: RBI, Morgan Stanley Research

Source: Haver Analytics, Morgan Stanley Research

Exhibit 15: New Investment Projects Slow Exhibit 16: Centre and State Capex Remains Healthy

Total Public Private 12M Trailing, YoY% Centre Capex State Capex
40,000 70%
35,000 New Investment Projects, Rs bn (4Q
trailing sum) 50%
30,000
25,000 30%
20,000
10%
15,000
10,000 -10%

5,000 -30%
0
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-24
Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Mar-23

Sep-23

-50%
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Feb-17

Oct-17
Feb-18

Oct-18
Feb-19

Oct-19
Feb-20

Oct-20
Feb-21

Oct-21
Feb-22

Oct-22
Feb-23

Oct-23
Feb-24
Source: CMIE, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

Exhibit 17: New Sales of Residential Units at Record Highs Exhibit 18: Steel and Cement, YoY% 3MMA
80 New Launches New Sales YoY% 3MMA
30.0%
Thousands

no of units Steel Cement

70
25.0%
60
20.0%
50
15.0%
40 10.0%
30 5.0%
20 0.0%
10 -5.0%

0 -10.0%
Feb-19

Feb-20

Feb-21

Feb-22

Feb-23

Feb-24
Nov-19

Nov-20

Nov-21

Nov-22

Nov-23
May-20
May-19
Aug-19

Aug-20

May-21
Aug-21

May-22
Aug-22

May-23
Aug-23
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
2Q23
3Q23
4Q23

Source: JLL, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

6
M
Idea

Exhibit 19: We Expect Investment to reach 36.2% of GDP by Exhibit 20: Investment, US$bn
F2027 5000 Investment, US$ bn
3579
4500 Bull
Investment, % of GDP
Mse
40% 4000

38% 36.2% 3500

36% 2941
3000
Base
34%
2500
32%
2000 2255
30%
1168 Bear
28% 1500
628
26% 1000
24% 176
500 43 67
22%
0
20%
0 F19841 2
F1994 3
F2004 4
F2014 5
F2024 6
F2034E 7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Source: CEIC, Morgan Stanley Research, Morgan Stanley Research Estimates
Source: CEIC, Morgan Stanley Research, Morgan Stanley Research Estimates

Morgan Stanley Research 7

M
Idea

b) Benign macro stability outlook

Inflation

We expect the inflation trend to remain range-bound: Headline CPI averaged 5.4% YoY
in F2024, in line with our expectations, vs. 6.7% in F2023. While food inflation remains
sticky and imparts volatility to the overall headline print, core inflation continues to
moderate and is even tracking below the 4% mark, aided by broad-based softening across
core goods and core services inflation.

In our base case, we expect supply and distribution normalization to continue and
commodity price pressures to remain within control. For food inflation, we are building in
a normal monsoon rainfall trend – while IMD forecasts an above-normal rainfall trend,
Skymet expects rainfall to remain normal in 2024. We thus expect food inflation to
decelerate on a YoY basis and therfore expect CPI inflation to track at 4.4% in 1HF25 and
4.7% in 2HF25, averaging 4.5% in F25. We expect core inflation to remain muted in 1HF25
and to show some modest upside in 2HF25, driven by base effects and building in some
increase in services inflation, as it averages at 4.1%.

However, inflation is unlikely to track at 4% on a sustained basis over the forecast

horizon: Even as inflation is expected to remain benign in our base case, we estimate
inflation to average 4.5% in F25 and F26 (assuming normal weather conditions/monsoon),
thus remaining above the 4% mark. To be sure, we do expect inflation to track below 4%
in 3Q24; however, that is mainly because of base effects. Thus, from 4Q24 onwards we
expect inflation to revert to the 4.5-4.8% range. In our view, with growth on track and
driven by improving productivity, it opens room for the RBI to focus on achieving the
inflation goal.

Risks to inflation in the near term: Risks to inflation outlook stem from:

• Weather-related idiosyncratic events affecting food inflation;

• Further increase in global commodity prices, particularly oil;
• Risk of imported inflation from strength in the US dollar; and/or
• Upside in core inflation from upside surprises in growth.

Exhibit 21: Food- and Fuel-Related Volatility Has Risen in Recent Exhibit 22: ...While Core CPI Softened in F2024
Years... Contribution to Core CPI, % ppt
Pan, Tobacco & Intoxicants Clothing & Footwear
9.0% Housing Household Goods and Services
Contribution to Headline CPI, % ppt Health Transport and Communication
CPI Food and Beverages CPI Fuel and Light Core CPI Recreation and Amusement Education
10.0% 7.0% Personal Care and Effects
9.0%
8.0% 5.0%
7.0%
6.0% 3.0%

5.0%
1.0%
4.0%
3.0%
F2013

F2014

F2015

F2016

F2017

F2018

F2019

F2020

F2021

F2022

F2023

F2024

-1.0%
2.0%
1.0%
0.0%
F2013

F2014

F2015

F2016

F2017

F2018

F2019

F2020

F2021

F2022

F2023

F2024

Source: CEIC, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

8
M
Idea

Exhibit 23: RBI Household Inflation Survey Shows Moderating Exhibit 24: We Expect Headline CPI at 4.5% in F2025 and F2026
Inflation 13%
Headline CPI Core CPI MSe
18 11% YoY%
RBI - Household Inflation Expectation Survey (Median)
16 9% Targeted CPI=8%
3-Month Ahead
7% Targeted CPI=6%
14 12-Month Ahead
5%
12
3% Targeted CPI=4%

10 1%

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24

Mar-25

Mar-26
8

6 Source: CEIC, Morgan Stanley Research, Morgan Stanley Research Estimates

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23

Source: Haver Analytics, Morgan Stanley Research

Current Account Balance

Benign trend in the current account deficit: The trend in merchandise trade deficit
moderated in F2024 as commodity prices eased. Indeed, the commodity trade deficit is
tracking at 4.8% of GDP on a three-month trailing basis as of March 2024 vs. its peak of
6.3% of GDP in December 2022. At the same time, the services trade surplus has
moderated to 4.7% of GDP in the three months ending March 2024 from 4.1% of GDP in
QE June 2023. On balance, the current account deficit remains range-bound, tracking at
0.9% of GDP in F2024e.

Volatility in global commodity prices and geopolitical tensions pose risks: In our base
case we estimate the current account deficit to remain range-bound at 1-1.5% of GDP in
F25-26, well within the policymakers' comfort zone, building in an average oil price of US
$89/bbl in F25e (per Morgan Stanley's estimate – see The Oil Manual: Incorporating
Geopolitical Risk). Oil remains a key source of energy for India, with ~85% of India's oil
consumption needs being met through imports; as such, this poses risks to the external
balance sheet. To recall, a 10% increase in oil prices can widen the current account deficit
by 30bp of GDP. As such, India's external balance sheet position remains strong and
funding of the current account deficit has remained manageable as the capital account
remains healthy with BoP in surplus over the last three quarters.

To be sure, the benign trend in both prices and external stability is a favourable
ramification of the improving productivity trend as mentioned above. While inflation is
likely to continue to moderate, it is likely to remain above the RBI's medium-term target of
4%, and to that extent warrants the RBI remaining steadfast on its disinflationary path,
without easing rates.

Morgan Stanley Research 9

M
Idea

Exhibit 25: Trade Balance and Trade Balance ex Commodities Exhibit 26: Services Trade Balance Remains in Surplus
Quarterly Annualised, % of GDP 6.0% Service balance, monthly annualised (% GDP)

2% 5.5% Services balance, 3M trailing sum, annualised (% GDP)

Trade Balance Trade Balance ex Commodities

0%
5.0%
4.7%
4.5%
-2%
4.3%
4.0%
-4%
3.5% 3.2%
-6% 3.0%
3.0%
-8% 2.5%

2.0%
-10%

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
Sep-14

Sep-15

Mar-19

Mar-20

Sep-21

Sep-22
Mar-14

Mar-15

Mar-16

Sep-16

Mar-17

Sep-17

Mar-18

Sep-18

Sep-19

Sep-20

Mar-21

Mar-22

Mar-23

Sep-23

Mar-24
Source: CEIC, Morgan Stanley Research Source: Haver Analytics, Morgan Stanley Research

Exhibit 27: FX Reserves Rise to All-time Highs while Import Exhibit 28: We Expect CAD at 1-1.5% of GDP in F2025 and
Cover Remains Healthy F2026

648.6 20
FX Reserves, US$ bn
600 18
Import Cover, months (RS)
16
500
14
400
11.4 12
10
300
8
200 6

4
100
2

0 0
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Apr-22
Apr-23
Apr-24

Source: CEIC, Morgan Stanley Research , Morgan Stanley Research Estimates

Source: CEIC,RBI, Morgan Stanley Research

10
M
Idea

Monetary policy response

We have been highlighting in the past that the RBI may in fact keep the policy rate steady
at 6.5%, contingent on global factors such as higher commodity prices, delayed start/
shallower easing from the Fed and a stronger dollar, or domestic factors such as
continued upside surprise in growth, driven by capex and productivity, implying higher
equilibrium real rates. See India Economics: Building Stronger Recovery (26 Mar 2024).

The RBI's nuance on real rates: A sustained strong trend in growth implies higher
potential GDP growth, and as such implies higher neutral real rates. In the Post Policy
Conference, while Dr. Patra indicated that real rates should be viewed "in terms of the
distance at which inflation is from the target," Governor Das suggested that consistently
higher GDP growth rates warrant a rework of the neutral rates from the erstwhile
numbers, as suggested in the RBI’s working paper (Patra, 2022), at 0.8-1%, with a
confidence band of 90bps. Further, the paper also examined a modified version to
estimate neutral real rates using the pace of leverage, and the findings indicate that a
neutral rate could then be higher at 2-2.1%, even though the paper noted that the
sensitivity of the leverage gap to changes in real interest rates is estimated to be modest.

Our views: The confluence of both global and domestic factors mentioned above
warrants the RBI staying put. As such, we now expect the policy rate to remain steady at
6.5%, vs. our previous view of a shallow rate cut cycle from 3Q24, implying that real rates
track at 200bps (similar to the average real rates of 190bps during 2003-2007).

The RBI has also been managing interbank liquidity in response to risks to the inflation
trajectory. Indeed, interbank liquidity conditions had tightened materially between
September 2023 and February 2024, as reflected in the weighted average call rate
tracking above the repo rate at close to 6.7% as trailing inflation tracked higher alongside
seasonal and frictional factors. Over the past month, an easing of seasonal and frictional
factors has led to a surplus in interbank liquidity and easing of the weighted average call
rate to 6.4%. We expect the RBI to manage liquidity conditions such that the call rate
tracks within the band of the repo rate and standing deposit facility (SDF).

In our view, 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.

Morgan Stanley Research 11

M
Idea

Exhibit 29: Interbank Liquidity Improved.., Exhibit 30: … Leading to Some Easing in Short-term Rates
140 Interbank Liquidity 3M T-Bills
8.5 3M CD
120 (US$ bn) Wtd Avg Call Rate
Repo Rate
100 7.5 3M CP
80
6.5
60
40 5.5
20
4.5
0
-20 3.5
-40
2.5
Apr-19

Oct-19

Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Oct-22

Apr-23

Oct-23

Apr-24

Jun-20

Feb-22

Jun-22

Feb-23

Jun-23

Feb-24
Aug-20

Feb-21

Jun-21
Aug-21

Aug-23
Dec-20

Dec-21

Aug-22
Oct-22
Dec-22

Oct-23
Dec-23
Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Apr-23

Apr-24
Source: Bloomberg, Morgan Stanley Research

Source: RBI, CEIC, Bloomberg, Morgan Stanley Research

Exhibit 31: Tracking Trend in Real Rates Exhibit 32: We Expect Policy Rates to Remain Steady at 6.5%
6% 8% MSe 5%
Repo Rate
3% 7% 4%
3%
0% 6%
2%
-3% 5%
Avg real rates on CPI was
1%
-6% 1.9% between 2003-2007
4% 0%

-9% 3% -1%
Real Policy Rate (on Monthly CPI) Real Repo
Rate(RS) -2%
-12% Real Policy Rate (on 12M trailing CPI) 2%
Headline CPI -3%
-15% 1% -4%
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-24

0% -5%
Mar-15

Mar-16

Mar-17

Mar-19

Mar-20

Mar-21

Mar-23

Mar-24

Mar-25
Mar-18

Mar-22

Mar-26
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23

Sep-24

Sep-25
Source: CEIC, RBI, Morgan Stanley Research

Source: CEIC, RBI, Morgan Stanley Research , Morgan Stanley Research Estimates

12
M
Idea

Risks to our view

In our view, risks stem from (a) a weaker-than-anticipated trend in domestic growth owing
to faltering domestic demand or the global macro environment and geopolitical tensions
weighing on capex and exports, or (b) faster-than-expected moderation in the inflation
trajectory , to align with the 4% mark on a sustained basis. Either of these may prompt the
RBI to embark on a rate easing cycle.

On the other hand, escalated geopolitical tensions and/or a supply-side-driven sustained

increase in commodity prices (especially oil), leading to a deterioration in macro stability
indicators, would warrant a more hawkish stance. However, the bar for any rate hikes will
be high.

Exhibit 33: Sensitivity of Macroeconomic Indicators to Global Oil Exhibit 34: Months to First Rate Cut vs. Pace of Rate Cuts for
Prices US Fed Funds Rate
Base case for FY25E, Sensitivity to 10% rise in 10 2
Oil at US$89/bbl oil prices
9 1.8
Current account balance (% of GDP) -1.3% 0.30% 8 1.6
CPI Inflation, YoY% 4.5% 0.40%
7 1.4
WPI Inflation, YoY% 3.6% 0.80%
6 1.2
GDP Growth, YoY% 6.8% -0.15%
5 1
Cut of RS 1/ltr of excise 4 0.8
Memo item duty on petrol and diesel
3 0.6
Oil taxes (% of GDP for F24 annualised) 0.8% -0.06%
2 0.4
Source: RBI, CEIC, Morgan Stanley Research *GDP impact is as per RBI estimates. Sensitivity to WPI, CPI 1 0.2
is based on weight of fuel in the index
Months to first rate cut Pace of rate cuts, RS
0 0

Mar-24
Feb-24
Jul-23
Jun-23

Aug-23

Sep-23

Oct-23

Jan-24
Apr-23

Nov-23

Dec-23

Apr-24
May-23

Source: Bloomberg, Morgan Stanley Research

Morgan Stanley Research 13

M
Idea

Disclosure Section
Information and opinions in Morgan Stanley Research were prepared or are disseminated by one or more of the following, which accept responsibility for its contents: Morgan Stanley Asia
Limited, and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H),
regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with,
Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734
576, holder of Australian financial services license No. 233742), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services
license No. 240813, and/or Morgan Stanley India Company Private Limited having Corporate Identification No (CIN) U22990MH1998PTC115305, regulated by the Securities and Exchange Board
of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration No. INH000001105), Stock Broker (SEBI Stock Broker Registration No. INZ000244438), Merchant Banker (SEBI
Registration No. INM000011203), and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-567-2021) having registered office at 18th Floor,
Tower 2, One World Center, Plot- 841, Jupiter Textile Mill Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400013, India Telephone no. +91-22-61181000; Compliance Officer Details:
Mr. Tejarshi Hardas, Tel. No.: +91-22-61181000 or Email: tejarshi.hardas@morganstanley.com; Grievance officer details: Mr. Tejarshi Hardas, Tel. No.: +91-22-61181000 or Email: msic-compli-
ance@morganstanley.com which accepts the responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research
and their affiliates (collectively, "Morgan Stanley").
For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website
at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY,
10036 USA.
For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada
+1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81
(0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Global Research Conflict Management Policy

Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. A
Portuguese version of the policy can be found at www.morganstanley.com.br

Important Disclosures
Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those
who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser.
The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research
may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the
solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes
in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There
may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future
performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject
company's securities/instruments.
The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors,
including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive
factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the
profitability or revenues of particular trading desks.
With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive
information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from
when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information
known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
Morgan Stanley may make investment decisions that are inconsistent with the recommendations or views in this report.
To our readers based in Taiwan or trading in Taiwan securities/instruments: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL").
Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research
may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Any non-customer reader within the scope of Article
7-1 of the Taiwan Stock Exchange Recommendation Regulations accessing and/or receiving Morgan Stanley Research is not permitted to provide Morgan Stanley Research to any third party
(including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities regarding Morgan Stanley Research which may create or give the
appearance of creating a conflict of interest. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation
or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.
Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or
the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant
approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Neither this report nor any part of it is intended as, or shall constitute, provision
of any consultancy or advisory service of securities investment as defined under PRC law. Such information is provided for your reference only.
Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A. located at Av. Brigadeiro Faria Lima, 3600, 6th floor, São Paulo - SP, Brazil; and is regulated by the Comissão
de Valores Mobiliários; in Mexico by Morgan Stanley México, Casa de Bolsa, S.A. de C.V which is regulated by Comision Nacional Bancaria y de Valores. Paseo de los Tamarindos 90, Torre 1,
Col. Bosques de las Lomas Floor 29, 05120 Mexico City; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group
Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents) and by Morgan Stanley Bank Asia Limited; in Singapore by Morgan Stanley Asia
(Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of

14
M
Idea

Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research) and by Morgan
Stanley Bank Asia Limited, Singapore Branch (Registration number T14FC0118J); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley
Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail
clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license
No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited having
Corporate Identification No (CIN) U22990MH1998PTC115305, regulated by the Securities and Exchange Board of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration
No. INH000001105); Stock Broker (SEBI Stock Broker Registration No. INZ000244438), Merchant Banker (SEBI Registration No. INM000011203), and depository participant with National
Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-567-2021) having registered office at 18th Floor, Tower 2, One World Center, Plot- 841, Jupiter Textile Mill Compound, Senapati
Bapat Marg, Lower Parel, Mumbai 400013, India Telephone no. +91-22-61181000; Compliance Officer Details: Mr. Tejarshi Hardas, Tel. No.: +91-22-61181000 or Email: tejarshi.hardas@morgan-
stanley.com; Grievance officer details: Mr. Tejarshi Hardas, Tel. No.: +91-22-61181000 or Email: msic-compliance@morganstanley.com; in Canada by Morgan Stanley Canada Limited; in Germany
and the European Economic Area where required by Morgan Stanley Europe S.E., regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin) under the reference number 149169;
in the United States by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation Authority, disseminates in the UK research that it has prepared, and research which has been prepared by any of
its affiliates, only to persons who (i) are investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended,
the “Order”); (ii) are persons who are high net worth entities falling within Article 49(2)(a) to (d) of the Order; or (iii) are persons to whom an invitation or inducement to engage in investment
activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, as amended) may otherwise lawfully be communicated or caused to be communicated. RMB Morgan
Stanley Proprietary Limited is a member of the JSE Limited and A2X (Pty) Ltd. RMB Morgan Stanley Proprietary Limited is a joint venture owned equally by Morgan Stanley International Holdings
Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being disseminated by Morgan Stanley
Saudi Arabia, regulated by the Capital Market Authority in the Kingdom of Saudi Arabia, and is directed at Sophisticated investors only.
The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating
to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was
developed by and is the exclusive property of MSCI and S&P.
Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
Indicators and trackers referenced in Morgan Stanley Research may not be used as, or treated as, a benchmark under Regulation EU 2016/1011, or any other similar framework.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA),
and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who
we are satisfied meets the regulatory criteria to be a Professional Client. A distribution of the different MS Research ratings or recommendations, in percentage terms for Investments in each
sector covered, is available upon request from your sales representative.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority
(the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.
As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment
advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These
opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about
outcomes that fit your expectations.

Registration granted by SEBI and certification from the National Institute of Securities Markets (NISM) in no way guarantee performance
of the intermediary or provide any assurance of returns to investors. Investment in securities market are subject to market risks. Read
all the related documents carefully before investing.

© 2024 Morgan Stanley

Morgan Stanley Research 15