Lower inflation with declining food prices will allow more leeway to the central bank’s monetary policy committee to cut rates this fiscal, Morgan Stanley researchers said on March 18.
“Lower trailing inflation driven by decelerating food prices opens up room for additional easing. We expect CPI inflation to average 4 percent in FY26, which implies cumulative easing of 75bps (vs 50bps previously),” they pointed out.
India’s inflation declined to a seven-month low of 3.6 percent in February, as food prices saw a sharp deceleration. Food inflation settled at a 21-month low of 3.8 percent for the month.
“For F2026, the outlook for food inflation has improved as both summer and winter crop production are estimated to rise on a YoY basis, which will also help to reduce volatility as it creates a buffer. Further, incoming data have helped provide more evidence,” the economists noted.
Morgan Stanley expects inflation to settle at 4 percent for the coming fiscal, lower than Reserve Bank of India’s forecast of 4.2 percent.
Reserve Bank of India’s MPC in February delivered its first cut in five years, as it slashed the policy rate to 6.25 percent from 6.5 percent earlier.
MPC is likely to deliver another rate cut in the upcoming April meeting, according to economists.
In a poll conducted in February, economists had pegged a 77 percent probability to a rate cut for the April meeting.
“The recent benign trend in inflation, along with expectations of a continued favourable outcome over the coming months, has meant that real rates have edged higher. Indeed, they averaged ~2.4% in January-February 2025 vs. the 1.4-1.9% range described by the RBI for neutral rates.
Further, even as growth is recovering, the trend in credit growth at ~11% remains soft – indicating room for financial conditions to ease,” Morgan Stanley economists said pointing to possibility for more cuts.
MS expects inflation to settle at 3.9 percent in March and Reserve Bank of India to cut rates by another 50 bps over the next two meetings to take policy rate to 5.75 percent.
In the February poll, economists had pegged the policy rate to settle at 5.75 percent by end of FY26.
However, researchers noted that further rate cuts could also occur, if inflation undershoots or credit growth remains below 12 percent.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
