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Informist, Tuesday, Sept. 16, 2025

 

NEW DELHI – The Reserve Bank of India's Monetary Policy Committee is likely to cut the policy repo rate by 25 basis points each in its next two meetings in October and December to 5%, due to the disinflationary trend in the economy, Morgan Stanley said in a research report Tuesday. Upasna Chachra and Bani Gambhir, economists at the brokerage, see consumer price index inflation averaging well below RBI's 3.1% forecast for 2025-26 (Apr-Mar).

 

"The benign trend in headline CPI is likely to be perpetuated further by disinflationary impulses from low food prices, goods and services tax rate cuts & lack of input price pressures," the report said. "As such, we expect headline CPI to average at 2.4% year-on-year in FY26, allowing RBI to cut rates by 25 bps each in October & December." The economists expect the real policy rate – the nominal repo rate net of inflation – to average 1.25-1.50% in 2026, signalling accommodative financial conditions through the next calendar year.

 

India's headline CPI rose for the first time in 10 months to 2.07% in August, but was at the lower end of RBI's 2-6% medium-term target band. Morgan Stanley noted that CPI inflation being below the 4% target for seven months was driven by food disinflation, which is likely to persist due to better crop production. At the same time, specific measures of core inflation indicate sustained moderation in underlying demand, even as core CPI inflation remains steady at around 4.2% in August, the report said.

 

The GST rate rationalisation affirmed by the GST Council earlier this month and set to roll out next week, is likely to bring down headline inflation by 50-60 bps, based on Morgan Stanley's analysis. Input pressures remain low, with wholesale price index inflation in negative territory for the last few months and likely to average only 1% for the fiscal year. This should help keep CPI inflation at 3.9% in FY27 also, the report said.

 

"Risks of a deeper rate easing cycle would stem from a consistently weak trend in inflation, which would create further elbow room for policy easing," the economists said.

 

Meanwhile, GDP growth remains weak when looked at from the nominal lens, the economists said. India's real GDP growth rose to a five-quarter high of 7.8% in the June quarter, but nominal GDP growth was sluggish at 8.8% on year as inflation fell sharply. Morgan Stanley expects nominal GDP growth to average only 8.3% in FY26, against recent annual nominal growth rates of 10.5-11%.

 

The consumption push from GST reductions is likely to be a positive for the economy, but the economists remain wary of the drag from slowing external demand. The US, India's top export destination, has imposed a 50% tariff on inbound goods from India starting Aug. 27. While August's trade data did not show a large impact of the move, exports could fall sharply in the coming months.

 

"While policy easing both fiscal and monetary will likely support private consumption recovery in 2HF26 (Oct-Mar), there are some drags to growth outlook from softening in public capex spending post the front loaded growth and drag from external demand," the report said.  End

 

Reported by Aaryan Khanna

Edited by Nishant Maher

 

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