The RBI projects CPI inflation at 4.2% for FY26

Informist New Delhi

Morgan Stanley has lowered its India CPI inflation forecast by 30 basis points to 4.0% for 2025-26 (Apr-Mar) after prices rose lower than expected in January and February. With inflation seen at Reserve Bank of India's medium-term target of 4% next year, the Monetary Policy Committee could lower interest rates by another 50 bps, compared to 25 bps previously expected, economists at Morgan Stanley said in a report. 

Last month, the RBI's rate setting panel lowered the repo rate for the first time in nearly five years as inflation was seen moving closer to 4% going ahead, while GDP growth is estimated to fall to a four-year low of 6.5% in FY25.  

CPI inflation fell to a seven-month low of 3.61% in February from 4.26% in January, and is expected to remain below 4% in March as well. Morgan Stanley has lowered its inflation forecast for Jan-Mar to around 4% from 4.5% seen earlier. The RBI projects CPI inflation at 4.2% for FY26. 

The outlook for food inflation--the key driver of headline CPI inflation in the last 12 months--has improved for next year as both summer and winter crop production is seen rising. Core inflation--or inflation without food and fuel items--has been well behaved under 4% in the recent past and Morgan Stanley expects it to remain contained at around the 4% mark. 

According to Morgan Stanley, growth in India is recovering but the trend in credit growth at around 11% remains "soft", which indicates there is room for financial conditions to ease. "Thus, we build in one additional rate cut by the RBI of 25 bps in June, leading to a cumulative easing of 75 bps (as opposed to our prior view of 50 bps) in the current rate easing cycle... ...and a terminal policy rate of 5.75%," Morgan Stanley economists Upasana Chachra and Bani Gambhir noted.