New Delhi: Global investment bank Morgan Stanley has projected that India’s retail inflation, measured by the Consumer Price Index (CPI), will average 4% during the financial year 2025-26. In a report released on Tuesday, March 18, the firm indicated that a continued decline in food prices is expected to keep inflation subdued, allowing the Reserve Bank of India (RBI) room for further monetary easing.
Scope for 0.75% Policy Rate Cut
Morgan Stanley noted that the moderation in inflation opens the possibility of a 0.75% (75 basis points) cut in policy interest rates in the coming months—up from an earlier estimate of 0.50% (50 basis points). The firm also suggested the likelihood of an additional 0.25% (25 basis points) rate cut, given that overall inflation in January and February remained below expectations.
“Headline inflation has consistently undershot projections for two consecutive months. This, along with easing food prices, prompts us to revise our monetary policy outlook and include another 25 basis points cut,” the report stated.
Lower Inflation Projections for FY2025-26
Previously, Morgan Stanley had estimated CPI inflation at 4.3% for FY2025-26. This has now been revised downward to 4%. The report emphasized that January and February saw sharper-than-anticipated declines in retail inflation, primarily driven by falling food prices. Meanwhile, core inflation (excluding food and fuel) has remained within a narrow and subdued range.
“For the quarter ending March 31, we now expect inflation to average 4%, compared to our earlier forecast of 4.3%,” the report added. Given that RBI’s inflation target range is 2-6%, Morgan Stanley believes there is room for further rate reductions.
Food Inflation Trends and Agricultural Outlook
In February, CPI-based inflation stood at 3.61%, dipping below the RBI’s 4% target for the first time in six months. Although food inflation had remained above headline inflation over the past year—due in part to weather-related disruptions—Morgan Stanley noted that the outlook has improved.
The report highlighted a projected year-on-year increase in both rabi and kharif crop production in FY2025-26, which is expected to help stabilize food prices and reduce volatility.
Monetary Policy Implications
Despite the economy showing signs of faster growth, credit expansion remains modest at 11%, alleviating concerns about financial stability. This, along with ample liquidity, could support further rate cuts.
Morgan Stanley also pointed out the surprising decline in core inflation, driven by subdued prices of core goods and services. Even though base effects may cause a slight rise in core inflation in the near term, commodity prices are expected to remain range-bound, keeping core inflation close to 4%.
The softening of food inflation is likely to maintain downward pressure on overall CPI, which is closely watched by the RBI in its policy decisions. The report concludes that continued moderation in inflation creates a favorable environment for further policy rate cuts, supporting economic growth while maintaining macroeconomic stability.
