Will Low Inflation Allow RBI to Cut Rates by 50 Bps This Year?
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Synopsis
Discover how India's low inflation rate, influenced by GST cuts and declining food prices, could empower the RBI to lower policy rates by 50 bps this year. Uncover insights from Morgan Stanley's report that highlights the economic landscape ahead.
Key Takeaways
- India's inflation rate is projected to remain low this year.
- GST rate cuts and falling food prices are major contributors.
- The RBI may cut policy rates by 50 bps.
- Core inflation remains stable at 4.2 percent.
- External factors warrant careful monitoring.
New Delhi, Sep 15 (NationPress) The inflation rate in India, as gauged by the Consumer Price Index (CPI), is projected to stay low, thanks to reductions in GST rates and a drop in food prices. This scenario is expected to provide the Central Bank with room to lower the policy rates by an additional 0.5 percent (50 bps) this year, as per a report by Morgan Stanley released on Monday.
“The favorable trend in headline CPI is anticipated to continue, driven by disinflationary factors such as low food prices, GST rate cuts, and the absence of input price pressures. Therefore, we forecast that headline CPI will average 2.4 percent year-on-year in FY26, allowing the RBI to implement rate cuts of 25 bps (0.25 percent) in both October and December,” the report elaborated.
For the past seven months, headline CPI inflation has been below the RBI's target of 4 percent, largely influenced by the disinflation of food prices. Nevertheless, core inflation remains stable at 4.2 percent, with core inflation hovering at 3.1 percent—below the 4 percent mark for 22 consecutive months—indicating an ongoing moderation in underlying inflation, as noted in the report.
The disinflationary trend is primarily driven by a mix of factors, including persistent low food prices and a favorable outlook due to improved crop yields and GST adjustments, which are expected to lead to downward pressure on overall price levels. Our sensitivity analysis suggests a potential impact of 50-60 bps,” the report added.
In this context, the report anticipates that headline CPI will average 2.6 percent year-on-year in the latter half of the financial year 2025-26, and 2.4 percent for the entire financial year.
However, it warned that while reduced indirect taxes may stimulate domestic demand from a low starting point in the second half of 2025-26, vigilance is necessary regarding the potential drag from external demand, influenced by unfavorable tariffs and the ongoing negotiations with the US.
"We are closely monitoring the monsoon trends and their effects on the current summer crop, the implications of GST rationalization on consumption and its pass-through to inflation, and external influences such as trade/tariff impacts on growth and capital flows, along with the Fed's rate adjustments," it stated.
Point of View
It is essential to remain vigilant about economic trends. While the report presents a promising outlook for inflation and potential rate cuts, it is vital to consider external factors that could influence growth and stability. The NationPress editorial team emphasizes a balanced view that recognizes both opportunities and challenges in this evolving economic landscape.
NationPress
15/09/2025
Frequently Asked Questions
What is the expected inflation rate for India this year?
The expected inflation rate for India this year is projected to average around 2.4 percent year-on-year, according to Morgan Stanley.
How much can the RBI potentially cut rates this year?
The RBI may have the capacity to cut rates by 50 bps (0.5 percent) this year, facilitated by low inflation.
What factors are contributing to low inflation in India?
Factors contributing to low inflation include GST rate cuts, a decline in food prices, and the absence of input price pressures.
How does core inflation compare to headline inflation?
Core inflation is currently at 4.2 percent, while headline inflation has been tracking below the RBI's target of 4 percent.
What external factors could affect India's economic outlook?
External factors include trade tariffs, negotiations with the US, and potential impacts from global economic conditions.
