The BRICS TimesLow inflation surprises drive expectations for a lower Repo Rate and a ‘wait-and-watch’ approach from the Reserve Bank of India.
Morgan Stanley Forecasts 25 BPS RBI Rate Cut in December Meeting
The Reserve Bank of India (RBI) will likely cut the Repo Rate by 25 basis points (bps). This is according to a new report from Morgan Stanley. The cut is expected during the December 2025 policy meeting. This forecast is mostly due to continued lower-than-expected Consumer Price Index (CPI) inflation.
Monetary Policy and Rate Outlook
Morgan Stanley stated its clear expectation. “On monetary policy, we expect the RBI to ease rates 25bp in the Dec-25 policy meeting, with a terminal policy rate of 5.25 per cent”. This reduction would lower the Repo Rate to 5.25 per cent. The central bank’s policy response should remain cautious. The RBI will likely become data-dependent after this move. It will also adopt a ‘wait and watch’ strategy. This lets the RBI evaluate its three-part easing plan. This plan covers rates, liquidity, and regulatory adjustments. The central bank will monitor domestic growth and inflation trends closely. Further steps will depend on this assessment.
Fiscal and Inflation Projections
The report also touched upon the government’s fiscal plan. It expects the government to maintain fiscal prudence. This means gradual fiscal consolidation will be the focus. Prioritizing capital expenditure will also continue. Morgan Stanley believes these steps are key to support medium-term growth. Regarding inflation, headline CPI is expected to rise slightly in 2026-27. This follows the low levels predicted for 2025. Inflation should eventually settle near the RBI’s 4 per cent target. Food prices might see a small rise due to a weak base effect. Core inflation is projected to remain stable. Both food and core CPI are likely to converge at 4-4.2 per cent year-on-year. This alignment will likely keep inflation expectations stable. This stability should boost consumer sentiment.
External Sector Strength
Morgan Stanley does not expect a significant widening of India’s current account deficit. It projects the deficit will stay range-bound at or below 1 per cent. India’s external financial situation remains solid. This strength comes from sufficient macro-stability buffers. These buffers include healthy foreign exchange reserves. Adequate import cover and low external debt-to-GDP levels also contribute.
