'Inflation to ease to 4.5-4.75% by Mar-17; 25-50 bp cut likely'

Inflation is expected to moderate to 4.5 percent to 4.75 percent by March 2017 and the Reserve Bank is likely to go for a 0.50 percentage point cut in this fiscal, says a Morgan Stanley report.

According to the global financial services major, inflation will remain on a moderating path, with near-term readings likely undershooting RBI's trajectory.

"With our forecast of CPI inflation at 4.5-4.75 percent for quarter ended March 2017 (lower than RBI's expectation of 5 percent) and RBI's lower real rate target of 1.25 percent, we expect a further 25-50 bps of rate cuts by March 2017," Morgan Stanley said in a research note.

Easing food prices is the key factor driving the moderation in inflation. Other drivers of inflation include -- rural/urban wages, global commodity prices, disinflation from excess capacity, and fiscal consolidation.

"As we expect the incoming inflation readings before the next policy meeting to show further moderation and potentially be better than RBI's expectations, we see a higher probability (60 percent) that the central bank will move again to cut rates at the December 7 meeting," the report said.

MPC, which has three members nominated by the government and the rest from RBI, lowered repo rate to 6.25 percent from 6.50 percent at the end of 2-day deliberations on October 4.

The next meeting of the MPC is scheduled on December 6 and 7.

On growth, the report said the macro environment has seen steady improvement in the past two years; however, the pace of growth recovery had been "slower than anticipated".

"In the last six months, we have seen a broadening of the recovery with a pickup in discretionary consumption. We believe the recovery in this cycle will be led by domestic demand consumption, public capex and foreign investment," the report said.

According to Morgan Stanley, the drag from external demand is gradually declining, going forward external demand to stabilise.