Morgan Stanley Sees Room for RBI Rate Cuts as Inflation Softens

According to a recent report by Morgan Stanley, India’s inflation is likely to ease further, giving the Reserve Bank of India (RBI) scope to reduce policy interest rates. Headline inflation is projected at 2.4% year-on-year for FY26, well below the RBI’s target of 4%. The report suggests possible rate cuts of 50 basis points, split into two 25-bps reductions, with expectations that these cuts may occur in October and December. The RBI’s next monetary policy meeting is due on October 1. 

Key Drivers of Disinflation

Morgan Stanley identifies several factors contributing to the softening inflation trend:

• Food prices are falling, aided by better crop output. 
• Recent GST rate cuts are easing tax burdens on many goods. 
• Input cost pressures have remained milder, helping contain the costs of production. 
• Core inflation remains elevated at around 4.2%, while non-food, non-fuel inflation has stayed below 4% for 22 consecutive months. This shows a stable underlying price trend. 

Projections and Risk Factors

For the second half of FY26, Morgan Stanley forecasts CPI inflation to average 2.6%, and hold at 2.4% for the full fiscal year. While the outlook is generally benign, the report highlights several risks:

• Global demand is weakening, which could impact trade and supply chains. 
• Tariff uncertainties and trade tensions, especially with international partners. 
• Domestic seasonal factors, such as monsoon variation and crop yield performance that may influence food inflation. 

Implications for Monetary Policy

Given this disinflationary environment, Morgan Stanley believes there is room for RBI to act. With inflation comfortably below the target, cuts of 25 bps in October followed by another in December seem likely. However, the timing and magnitude of cuts will depend heavily on how inflation metrics evolve and how external risks like global commodity prices and trade policy move. 

Other policy watchers will also observe how easing inflation interacts with growth data, fiscal pressures, and global investor sentiment. The effectiveness of rate cuts depends not only on inflation numbers but also the RBI’s communication, liquidity conditions, and transmission of policy into lending rates.

Conclusion

Morgan Stanley’s outlook suggests that with inflation well under control, the RBI has a credible path to ease policy over the coming months. While 50 basis points of cuts appear plausible, much will depend on how global and domestic factors unfold. Investors and markets will closely monitor upcoming inflation releases, crop and food data, and RBI’s own assessment at its October meeting before making confident projections