Chetan Ahya, Chief Asia Economist at Morgan Stanley, has projected that the Reserve Bank of India (RBI) is likely to implement two more interest rate cuts in 2025. Despite a challenging global environment, Ahya believes that India's growth momentum remains strong, offering the RBI enough space to support the economy while keeping inflation under control

Speaking to CNBC-TV18 at the Morgan Stanley India Investment Forum, Ahya shared his views on India’s macroeconomic outlook, RBI’s rate trajectory, inflation, bond yields, and the currency landscape.

India’s Growth to Remain Resilient

Ahya acknowledged that India’s GDP growth of 6.5% in FY24 beat expectations and showed strength, especially when adjusted for indirect taxes. However, he added a note of caution, saying the underlying growth number was slightly lower at 6.8%, suggesting the real economy may not be as robust as the headline indicates.

Despite this, Morgan Stanley is maintaining its growth forecast of 6.2% for calendar year 2025. Ahya emphasised that while global tariffs and policy shifts pose downside risks, strong domestic policy support—particularly capital expenditure from both central and state governments—will help balance the external headwinds.

Inflation Below 4% Offers Comfort

Ahya reinforced Morgan Stanley’s expectation of continued disinflation in Asia, including India. With oil prices softening, the tariff-induced deflationary impact, and strengthening local currencies, he projects India’s inflation to average around 3.8% in 2025, possibly dipping to 3.6% by Q4.

This trend, he explained, gives RBI ample room to cut rates twice, keeping real interest rates near 1.5%, a level he considers balanced for a growing economy.

"If growth falters more than expected—say below 6.2%—the RBI could even go for 75 basis points of cuts," he added, though emphasising that further cuts would depend entirely on economic data

Dollar Weakness to Continue

Ahya expects the US dollar index (DXY) to weaken by another 9%, driven by a combination of US growth slowdown, tariff-related uncertainties, and fiscal imbalances.

He explained that the growth differential between the US and Asia will shift in Asia’s favour. While the US is expected to slow from 2.5% in 2024 to 1% in 2025, Asia will moderate only slightly, from 4.6% to 4.3%, and India’s growth will ease marginally from 6.7% to 6.2%

Additionally, a 4% US current account deficit and investor concern over Section 899—a provision in a recent US House bill that could tax foreign investments—are expected to further weigh on the dollar

"The dollar will weaken, and emerging market currencies including the rupee will benefit," Ahya predicted

Indian Rupee to Strengthen

The Indian rupee (INR) is expected to appreciate by 2–3%, aided by lower inflation and a favourable growth differential. However, Ahya cautioned that China’s yuan (RMB) will act as a cap on regional currency appreciation due to deflationary pressures and tariff impacts

As a result, while INR may strengthen, its gains might be moderate compared to the euro or yen

Global Bond Yields and Fed Outlook

Ahya also shared Morgan Stanley’s forecast for the US 10-year bond yield, expecting it to fall to 4% by the end of 2025. This is based on assumptions that as US job growth slows, market expectations for Fed rate cuts will increase

While there are concerns over America’s growing fiscal deficit, Ahya believes weaker private demand will allow bond yields to fall, supporting global monetary easing cycles

Risks from China’s Rare Earth Policy

Ahya flagged a less-discussed risk—China’s rare earth magnet export policy. Automotive industry leaders like Rajiv Bajaj and Sudarshan Venu, as well as SIAM, have warned that delays in export clearances could disrupt vehicle production in India

The process, which requires global buyers to declare non-defence use, has proven to be lengthy and bureaucratic, posing a potential threat to India’s manufacturing output

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