RBI policy outlook: Morgan Stanley sees two 25 bps cuts by December; inflation forecast slashed to 2.4% for FY26

The Reserve Bank of India (RBI) is likely to cut policy rates by 25 basis points each in October and December, bringing the terminal rate down to 5 per cent, global brokerage Morgan Stanley has projected in its latest report. The easing cycle is supported by sustained disinflation and inflation undershooting the central bank’s 4 per cent target, the report said.Morgan Stanley expects headline consumer price index (CPI) inflation to average 2.4 per cent year-on-year in FY26 — a full 160 basis points below the RBI’s benchmark. “We expect headline CPI to average at 2.4 per cent YoY in FY26, allowing the RBI to cut rates by 25 bps each in Oct & Dec,” the report stated, ANI quoted.Disinflation drivers in focusThe report highlighted that food price softness, recent GST rate cuts and easing input costs are expected to sustain the benign trend. Headline CPI has remained below the RBI’s target for seven consecutive months, largely due to food disinflation. Core inflation has been range-bound at 4.2 per cent, while ‘core-core’ inflation has stayed below 4 per cent for the last 22 months, pointing to persistent moderation in underlying price pressures.While lower indirect taxes could boost domestic demand in the latter half of FY26, the report flagged a weak outlook for nominal GDP growth, projected at 8.3 per cent. Morgan Stanley noted that real GDP growth has held up but the soft price environment is weighing on nominal expansion. It also cautioned that tariffs and ongoing trade negotiations with the United States may add to external demand risks.The brokerage added that risks of a deeper rate-cut cycle cannot be ruled out if weak inflation persists. “Sustained softness in price pressures would create further elbow room for the central bank to deliver additional policy easing,” the report said.