RBI likely to cut rates by 25 bps each in Oct, Dec MPC; CPI may avg at 2.4% in FY26: Morgan Stanley
News Summary
A Morgan Stanley report indicates that the Reserve Bank of India (RBI) is expected to cut policy rates by 25 basis points in both its October and December Monetary Policy Committee (MPC) meetings, bringing the terminal policy rate to 5%. This move is prompted by persistently undershooting inflation, which creates room for monetary easing.
Background
The Reserve Bank of India (RBI) is India's central bank, responsible for managing the country's monetary policy, including setting key interest rates and controlling inflation. Its primary inflation target is 4%. The Monetary Policy Committee (MPC) is the body responsible for formulating these policies. The current news context indicates that India's inflation has tracked below the 4% target for seven consecutive months, with core inflation also remaining subdued. Morgan Stanley projects headline Consumer Price Index (CPI) inflation to average 2.4% year-on-year in FY26, significantly below the RBI's target, thus providing a rationale for rate cuts.
In-Depth AI Insights
Beyond inflation, what deeper economic trade-offs are at play behind the RBI's anticipated rate cuts? - The report highlights weak nominal GDP growth (projected 8.3% in FY26) alongside resilient real GDP growth. This suggests disinflationary pressures are eroding the nominal value of the economy, potentially constraining corporate revenues and government tax receipts. The RBI might be cutting rates to stimulate aggregate demand to counteract deflation's drag on nominal growth, even if real growth holds up. - Risks of weaker external demand, specifically from adverse tariffs and the outcome of ongoing trade negotiations with the United States, could further weigh on the Indian economy. The RBI might be preempting such external shocks by providing domestic monetary stimulus to prevent a harder economic landing. How might President Donald Trump's protectionist trade policies, specifically the US trade negotiations mentioned, explicitly impact the RBI's monetary policy trajectory? - The article explicitly flags "adverse tariffs and the outcome of ongoing trade negotiations with the United States" as a potential exacerbator of external demand weakness. Under President Trump's "America First" agenda, Indian exports could face increased market access hurdles or higher tariff barriers. This would directly reduce external revenues for Indian businesses and potentially lead to lower domestic investment and employment. - In response to such external shocks, the RBI might be compelled to adopt a more aggressive rate-cutting strategy to stimulate domestic consumption and investment, thereby offsetting the negative impact of declining exports. This could lead to a deeper easing cycle than currently projected to maintain economic stability. What does sustained core inflation moderation (below 4% for 22 months) suggest about India's long-term inflation outlook and investment landscape? - Core inflation (excluding volatile food and energy) remaining below 4% for 22 months suggests India might be experiencing a more structural disinflationary trend, rather than just short-term fluctuations. This could stem from improved production efficiency, supply chain optimization, or structural shifts in domestic demand. - A prolonged low-inflation environment would support lower interest rates, reducing borrowing costs for businesses and benefiting capital-intensive industries and infrastructure investments. Simultaneously, it might push investors towards higher-yielding assets like growth stocks over traditional fixed income, altering capital allocation strategies.