A report by Morgan Stanley on Tuesday projected that India’s consumer price index (CPI) inflation is expected to average 4% in FY26, paving the way for a cumulative 75 basis points (bps) rate cut by the Reserve Bank of India (RBI)—an upward revision from the previously estimated 50 bps easing cycle.
The report noted that lower trailing inflation, primarily due to easing food prices, has created space for additional rate cuts.
“We have updated our monetary policy outlook to incorporate one more 25 bps rate cut by the RBI, in light of lower-than-anticipated headline inflation prints for two consecutive months (January and February),” Morgan Stanley stated.
The firm now expects CPI inflation to average 4% in FY26, compared to its earlier forecast of 4.3%. Consequently, it has revised its cumulative rate easing forecast to 75 bps from the previous projection of 50 bps.
Faster-than-expected moderation in CPI data for January and February, primarily driven by easing food inflation, has led to the revision. Meanwhile, core CPI remains steady at benign levels.
For the March quarter, the report now projects CPI inflation to average 4%, down from its prior estimate of 4.5%. Morgan Stanley added that since the RBI targets headline CPI within a 2-6% range, the current trend provides ample room for further easing.
India’s CPI inflation declined to 3.61% in February, marking the first time in six months that it fell below the RBI’s 4% target.
Food inflation, which carries a 45% weightage in the CPI basket, has been a key driver of headline inflation over the past year, largely due to weather-related disruptions causing volatility. However, the outlook for FY26 has improved.
“For FY26, the food inflation outlook appears positive, with both summer and winter crop production estimated to rise on a year-on-year basis. This will help reduce volatility and create a buffer. Recent data further support this view,” the report highlighted.
Even as economic growth picks up, credit growth remains relatively soft at 11%, which alleviates financial stability concerns and suggests potential for further easing on regulatory and liquidity fronts.
Additionally, core inflation has been surprising on the downside, influenced by lower prices in core goods and services. Although core inflation may edge up as base effects normalize, it is expected to stay contained at around 4%, supported by stable commodity prices and producer price index (PPI) trends.
Morgan Stanley concluded that the disinflationary trend in food prices is likely to play a crucial role in sustaining lower headline CPI. This, combined with comfortable inflation levels, gives the RBI more flexibility for a deeper rate easing cycle.
(IANS)
