A recent report by Morgan Stanley has forecasted that India’s Consumer Price Index (CPI) inflation will average 4% in the financial year 2025-26 (FY26). This projection suggests that the Reserve Bank of India (RBI) may introduce a total rate cut of 75 basis points (bps) in the coming months, up from the previously estimated 50 bps.
Lower Inflation Creates Room for Rate Cuts
According to the report, the decline in inflation is largely driven by falling food prices, which has created room for additional monetary easing. Morgan Stanley noted that CPI inflation for January and February was lower than expected, prompting a revision in its monetary policy outlook. The firm now anticipates an additional 25 bps rate cut by the RBI, leading to a total reduction of 75 bps.
For the March quarter, the report predicts an average CPI inflation rate of 4%, compared to its previous estimate of 4.5%. Since the RBI targets a CPI range of 2-6%, the report suggests this lower inflation will allow the central bank to ease rates further.
Food Inflation Expected to Stabilize
India’s CPI inflation dropped to 3.61% in February, marking the first time in six months that it fell below the RBI’s 4% target. Over the past year, food inflation— which accounts for 45% of the CPI— has been a key driver of overall inflation due to weather-related disruptions.
However, Morgan Stanley expects food prices to stabilize in FY26, as both summer and winter crop production are projected to increase. This higher yield will help buffer food price volatility, providing further evidence for a stable inflation outlook.
Soft Credit Growth and Financial Stability
Despite economic growth gaining momentum, credit growth remains moderate at 11%, reducing financial stability risks. The report indicates that this trend could lead to additional regulatory and liquidity easing by the RBI.
Core inflation, which excludes volatile food and energy prices, has also been lower than expected. Although core inflation may rise slightly as base effects normalize, it is expected to stay around 4%, driven by stable commodity prices and production costs.
RBI May Opt for a Deeper Rate Cut Cycle
The report highlights that sustained disinflation in food prices will likely keep CPI inflation under control. This, in turn, provides the RBI with more flexibility for a deeper rate-cutting cycle.
With inflation staying within the target range and economic growth picking up, Morgan Stanley expects the RBI to continue its easing measures, supporting investment and consumption growth in the coming months.
