Mumbai, Sept 16: India’s inflation rate, measured by the Consumer Price Index (CPI), is expected to stay low this year. A Morgan Stanley report released on Monday said that cuts in GST rates and falling food prices will give the Reserve Bank of India (RBI) room to reduce policy rates by 0.5 per cent (50 basis points) during 2025.The report stated, “The benign trend in headline CPI is likely to continue due to low food prices, GST rate cuts, and limited input price pressures. We expect headline CPI to average 2.4 per cent year-on-year in FY26, which should allow RBI to cut rates by 25 bps (0.25 per cent) each in October and December.”
Headline CPI inflation has remained below the RBI’s target of 4 per cent for the last seven months. This is partly due to falling food prices. Core inflation, which excludes food and fuel, is tracking at 3.1 per cent and has stayed below 4 per cent for 22 months. The report says this shows that underlying inflation is steadily moderating.
The report explained that the downward pressure on prices is led by several factors. These include persistent softness in food prices, better crop production, and GST rationalisation. Together, these are expected to push overall prices lower. The report’s sensitivity analysis suggests a 50-60 bps impact on headline CPI due to these factors.
For the second half of FY26, the report expects headline CPI to average 2.6 per cent year-on-year, and 2.4 per cent for the full financial year. This suggests that inflation will remain manageable, giving RBI flexibility to adjust rates if needed.
However, the report also issued some cautions. It said lower indirect taxes could increase domestic demand in the second half of FY26. But external factors, such as trade issues, tariffs, and ongoing negotiations with the US, may affect growth and inflation.
Morgan Stanley added that careful monitoring will be needed on monsoon patterns, which could impact summer crops. It also highlighted the importance of watching how GST rationalisation affects consumption and inflation, as well as global factors, such as capital flows and the Fed’s rate easing.
In short, India’s inflation is likely to stay low in FY26, supported by food price trends and GST cuts. This gives RBI the scope to reduce interest rates, but careful attention to external and domestic factors will be necessary.