Morgan Stanley Projects India's CPI Inflation to Average 4% in FY26, Anticipates 75bps Rate Easing Cycle
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Synopsis
A recent report from Morgan Stanley indicates that India's CPI inflation is expected to average 4% in FY26, prompting a potential 75bps easing cycle by the RBI, up from the previously projected 50bps. This adjustment reflects the influence of declining food prices and recent inflation trends.
Key Takeaways
- India's CPI inflation projected at 4% for FY26.
- RBI expected to ease rates by 75bps.
- Food inflation has stabilized, aiding CPI trends.
- Core inflation remains steady at manageable levels.
- Recent data shows significant easing in inflation rates.
New Delhi, March 18 (NationPress) A report from Morgan Stanley released on Tuesday forecasts that the average consumer price index (CPI) inflation in India will reach 4 percent in FY26. This suggests a cumulative easing of 75bps by the RBI, a revision upwards from the previously estimated 50bps in the upcoming months.
The decrease in trailing inflation, primarily due to falling food prices, provides space for further easing. The report states, “We are updating our monetary policy outlook to include an additional 25bps rate cut by the RBI, considering the unexpectedly low headline inflation figures for the past two months (January and February).”
The projection indicates an average CPI of 4 percent for FY26, down from an earlier estimate of 4.3 percent. “Thus, we are now factoring in a total rate easing of 75bps, revising our previous outlook of 50bps,” it added.
Recent data for January and February CPI demonstrated a quicker-than-expected decline, attributed to easing food inflation, while core CPI remains steady at manageable levels.
For the quarter ending in March, “we now expect CPI inflation to average 4 percent, a revision from our earlier projection of 4.5 percent. The RBI targets a headline CPI (with a goal of 2-6 percent), indicating room for further easing,” stated Morgan Stanley.
India’s CPI inflation fell to 3.61 percent in February, marking its first dip below the RBI target of 4 percent in six months.
Food inflation, which constitutes 45 percent of the CPI, has significantly influenced the headline CPI over the last year, with weather-related fluctuations contributing to its volatility.
“However, the outlook for food inflation in FY26 has improved as both summer and winter crop outputs are projected to increase year-on-year, which will also help stabilize prices,” the report noted.
Despite a pickup in growth, credit growth remains soft at 11 percent, alleviating financial stability concerns and suggesting potential for more regulatory and liquidity easing.
Core inflation has been surprisingly low, driven by declines in core goods and services inflation. Although core inflation may rise slightly as base effects normalize, it is expected to stay around 4 percent, supported by stable commodity prices and PPI trends. The disinflation from food prices is anticipated to maintain a downward trend in headline CPI, which is of primary concern for the RBI, as per the report.
In this context, the comfort surrounding headline inflation offers the RBI more flexibility for an extensive rate easing cycle.
