The Reserve Bank of India (RBI) could reduce interest rates twice this year, with 25 basis point cuts expected in both October and December, according to global brokerage firm Morgan Stanley. If this happens, the RBI’s policy rate would come down to 5% by the end of 2025.
The report highlights that this move is possible because inflation has consistently remained below the RBI’s 4% target, giving the central bank room to ease monetary policy.
Inflation Expected to Drop to 2.4% in FY26
Morgan Stanley projects that India’s consumer price index (CPI) inflation will average just 2.4% in FY26 nearly 1.6 percentage points lower than the RBI’s benchmark target. The brokerage believes this trend will allow the RBI to cut rates twice before the year ends.
What’s Driving Disinflation?
Several factors are keeping prices in check:
Soft food prices have been the biggest contributor.
Recent GST rate cuts are reducing the cost burden on consumers.
Falling input costs are helping industries control prices.
Headline inflation has now stayed below 4% for seven straight months, while core inflation remains stable around 4.2%. More importantly, ”core-core” inflation (excluding volatile food and fuel) has been under 4% for 22 months, signaling a steady slowdown in underlying price pressures.
Growth Outlook and Risks
While cheaper prices and lower taxes may boost domestic demand in late FY26, Morgan Stanley cautioned that nominal GDP growth could remain weak at 8.3%. The report noted that although real GDP growth is holding up well, the soft price environment is pulling down the overall growth numbers. On the external front, ongoing tariffs and trade negotiations with the U.S. may pose additional risks to India’s growth momentum.
More Rate Cuts Possible if Inflation Stays Low
Morgan Stanley also said that if inflation continues to remain weak, the RBI may consider an extended rate-cut cycle. This could provide further relief to borrowers and businesses, while also stimulating demand in the economy.