India's Inflation Expected to Stay Low, RBI May Cut Rates Further: Morgan Stanley

India’s inflation, measured by the Consumer Price Index (CPI), is likely to remain low in the coming months, helped by falling food prices and recent GST rate cuts. This could give the Reserve Bank of India (RBI) more room to lower interest rates by up to 0.5% before the year ends, according to a report from Morgan Stanley released on Monday.

The report said overall inflation is being kept in check by three main factors: cheaper food, reduced GST rates, and lower input costs for businesses. Morgan Stanley expects CPI inflation to average 2.4% in FY26, which is well below the RBI’s 4% target. Based on this, the RBI may cut rates by 0.25% in both October and December.

For the past seven months, headline CPI has been under 4%, largely because of food price disinflation. Core inflation, which excludes food and fuel, has also stayed stable at around 3.1%—below 4% for the past 22 months. This suggests that price pressures in the broader economy are easing.

The report also highlighted that better crop output and GST reforms will likely continue to push prices down. Its analysis showed that GST rationalisation alone could reduce inflation by 50 to 60 basis points. Morgan Stanley now expects CPI inflation to average 2.6% in the second half of FY26, and 2.4% for the full year.

However, the report added a note of caution. While lower taxes may support domestic demand in late FY26, external risks remain. These include weaker global demand, ongoing tariff disputes with the US, and potential impacts on trade and capital flows.

“We are closely watching the progress of the monsoon and its effect on summer crops, the impact of GST changes on consumer spending, and external factors like tariffs and US Federal Reserve policies,” the report said.