India's CPI inflation to average 4 pc in FY26, 75bps rate easing cycle likely: Morgan Stanley

A Morgan Stanley report on Tuesday projected that it expects consumer price index (CPI) inflation in India to average 4 per cent in F26, which implies cumulative easing of 75bps by the RBI (compared to 50bps projected previously) in the coming months.

Lower trailing inflation driven by decelerating food prices opens up room for additional easing. “We update our monetary policy outlook to add one more 25bps rate cut by the RBI, in light of lower than anticipated headline inflation prints for two consecutive months ( January and February),” the report mentioned.

The report expects CPI to average 4 per cent in FY26 compared to its prior estimate of 4.3 per cent. “Thus, we pencil in a cumulative rate easing of 75bps, from our prior view of 50bps,” it added.

Incoming data for January and February CPI showed faster-than-expected moderation, driven by easing food inflation while core CPI remains range-bound at benign levels.

For the quarter ending March, “we now project CPI inflation to average 4 per cent vs. our prior estimate of 4.5 per cent. The RBI targets headline CPI (target of 2-6 per cent), so we believe this creates room for additional easing,” said Morgan Stanley.

India's CPI inflation dropped to 3.61 per cent in February, marking the first time in six months that it fell below the RBI target of 4 per cent.

Food inflation (weight of 45 per cent) has been a key driver of headline CPI in the last 12 months, with weather-related disruptions creating volatility.

“However, for FY26, the outlook for food inflation has improved as both summer and winter crop production are estimated to rise on a YoY basis, which will also help to reduce volatility as it creates a buffer. Further incoming data have helped provide more evidence,” the report noted.

Even as growth is picking up, the trend in credit growth is still soft at 11 per cent, which keeps financial stability concerns at bay and implies a likelihood of more easing on the regulation and liquidity front as well.

Core inflation has been surprising on the downside, driven by lower core goods and core services inflation. Indeed, even as core inflation may edge up as base effect normalises, it is expected to remain contained at around the 4 per cent mark, driven by range-bound trend in commodity prices/PPI. Disinflation from food prices is likely to have a greater impact in sustaining the decelerating trend in headline CPI, which the RBI targets, said the report.

In this light, comfort on headline inflation creates more elbow room for a deeper rate easing cycle by the RBI, it added.