Morgan Stanley Sees Scope for RBI Rate Cuts as Inflation Stays Subdued

India’s inflation, measured by the Consumer Price Index (CPI), is projected to remain low in the coming months, opening room for monetary easing. According to a recent report by Morgan Stanley, headline CPI inflation is expected to average 2.4% year-on-year in FY26, well below the Reserve Bank of India’s (RBI) 4% target. 

This moderation provides scope for the central bank to reduce policy rates by 50 basis points in two tranches of 25 bps each, likely in October and December. The RBI’s next policy meeting on October 1.

Key Drivers of Disinflation

The report attributes the disinflationary trend to multiple factors. Falling food prices, improved crop output, GST rate cuts, and subdued input cost pressures have significantly eased headline inflation.

Core inflation remains contained at 4.2%, while non-food, non-fuel inflation has stayed below 4% for 22 consecutive months, signalling stability in underlying price trends. Sensitivity analysis by Morgan Stanley suggests that GST rationalisation and softening food prices could lower inflation further by 50–60 basis points.

Projections and External Risks

For the second half of FY26, CPI inflation is expected to average 2.6%, while the full-year average is pegged at 2.4%. However, Morgan Stanley flagged potential risks, including weaker global demand, trade uncertainties with the US, and tariff-related disruptions.

Seasonal domestic factors, such as monsoon patterns and crop outcomes, will also be critical in shaping inflation trends.

Global and Policy Considerations

Beyond domestic drivers, global monetary conditions remain influential. The Federal Reserve’s policy stance could affect capital flows into India, impacting the pace of RBI’s monetary easing. Additionally, the success of GST rationalisation in boosting consumption while containing inflation will be an area to watch.

Also Read: RBI Slaps ₹21 Lakh Fine on PhonePe for PPI Rule Violations!

Conclusion

Overall, India’s benign inflation trajectory strengthens the case for RBI to lower rates further, potentially supporting growth. However, external headwinds and domestic agricultural factors may determine the timing and extent of such policy actions, requiring cautious optimism.

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