RBI Likely to Cut Rates Twice in FY26 as Disinflation Creates Policy Room: Morgan Stanley Outlook
The Reserve Bank of India (RBI) is forecasted to ease monetary policy twice by cutting interest rates, according to a recent report by global investment bank Morgan Stanley. With headline inflation running well below the central bank’s 4 percent target, the stage appears set for monetary accommodation to support economic growth amid evolving domestic and global risks.
Persistent Disinflation Creating Policy Space
India has witnessed a sustained period of low inflation, with headline Consumer Price Index (CPI) inflation remaining under the RBI’s target for seven consecutive months. Despite a slight rise to 2.07 percent in August from 1.61 percent in July, inflation is comfortably within the RBI’s tolerance range of 2-6 percent. Food price disinflation has been a key contributor to this trend.
Core inflation levels have also moderated, with the broader measure hovering around 4.2 percent, and core-core inflation—excluding food and energy—staying under 4 percent for 22 months. Morgan Stanley projects headline CPI inflation to average just 2.4 percent year-on-year in fiscal year 2026 (FY26), substantially below the RBI target. This prolonged softness in inflation provides the RBI with the "elbow room" needed for potential rate cuts.
Economic Growth Concerns Support Easing Case
While real GDP growth remains resilient, nominal GDP growth is expected to slow to 8.3 percent in FY26 due to subdued price increases. This nominal growth concern strengthens the case for monetary easing to stimulate broader economic activity.
Moreover, although recent Goods and Services Tax (GST) reductions are likely to support domestic demand in the latter half of FY26, external demand risks persist. Morgan Stanley flagged potential downside risks from trade tensions with the United States and global tariff uncertainties, which could weigh on India’s export-driven sectors.
Market Reaction and RBI’s Policy Outlook
At its August monetary policy meeting, the RBI held the repo rate steady at 5.5 percent with a neutral stance. Governor Sanjay Malhotra emphasized a data-dependent approach, highlighting the central bank’s cautious navigation between supporting growth and maintaining price stability.
Morgan Stanley’s report suggests that if the current disinflation trend continues, the RBI could implement two 25-basis-point rate cuts—in October and December 2025—lowering the terminal policy rate to 5 percent. This forecast aligns with broader market expectations as economists adjust inflation projections downward following the recent low inflation prints.
The possibility of a deeper rate-cutting cycle cannot be ruled out if price pressures remain subdued over the coming months, further opening space for monetary accommodation to support the Indian economy amid both domestic and global challenges.
This blog captures the key insights from Morgan Stanley’s outlook on India’s inflation trajectory, monetary policy space, economic growth concerns, and the central bank’s cautious yet potentially accommodative stance in FY26. The evolving macroeconomic environment signifies an important phase for investors, policymakers, and market watchers alike as India balances the dual objectives of growth and price stability.