New Delhi [India], September 16 (ANI): The Reserve Bank of India (RBI) is expected to lower policy rates by 25 basis points each in the upcoming Monetary Policy Committee (MPC) meetings in October and December, taking the terminal policy rate to 5 per cent, according to a report by Morgan Stanley.

The global brokerage firm noted that the central bank now has room for monetary easing as inflation continues to undershoot the target.

The report projects headline consumer price index (CPI) inflation to average at 2.4 per cent year-on-year in FY26, significantly below RBI's inflation target of 4 per cent.

It stated 'we expect headline CPI to average at 2.4 per cent YoY in F26, allowing the RBI to cut rates by 25bps each in Oct & Dec'.

The report also added that the benign trend in inflation is expected to be perpetuated further by disinflationary impulses from low food prices, recent cuts in Goods and Services Tax (GST) rates, and lack of input price pressures.

Headline CPI inflation in the country has been tracking below RBI's 4 per cent target for the last seven months, partly due to food price disinflation. Core inflation has also remained range bound, tracking at 4.2 per cent, while core-core inflation has stayed at 3.1 per cent and has been below 4 per cent for the last 22 months, indicating sustained moderation in underlying inflationary pressures.

Taking into account the downside to CPI, along with the weaker trend in nominal GDP growth even as real GDP growth has held up, the expects RBI to ease rates in October and December.

The report also pointed out that risks of a deeper rate easing cycle could emerge if the weak trend in inflation persists for longer. Sustained softness in price pressures would create further elbow room for the central bank to deliver additional policy easing.

At the same time, the report highlighted concerns around nominal growth, which is expected to remain subdued. Nominal GDP growth is projected at 8.3 per cent in FY26, reflecting weaker price trends.

While lower indirect taxes are likely to support domestic demand from a low base in the second half of FY26, the report flagged the risks of a drag from external demand.

This weakness, it said, could be accentuated by adverse tariffs and the outcome of ongoing trade negotiations with the United States. (ANI)