RBI May Cut Rates Twice Before Year-End, Says Morgan Stanley

Morgan Stanley believes the Reserve Bank of India (RBI) could lower interest rates sooner than expected. The global brokerage has forecast two cuts of 25 basis points (bps) each — one in October and another in December — which would bring the repo rate down to five per cent, according to a recent report by the Times of India.

The reason is straightforward: inflation is running well below the RBI’s comfort zone. Consumer prices are now projected to average only 2.4 per cent in FY26. With the target at four per cent, the central bank has enough room to ease without worrying about stoking price pressures.

Inflation Cooling, Growth Steady

The sharp drop in food inflation has played a key role. Prices of several farm products have eased, and that relief is showing up in the broader inflation numbers. Input costs for businesses have also softened, while tax-related pressures are lighter than before.

Core inflation is still around 4.2 per cent, but a narrower measure that excludes the most volatile items has been under four per cent for almost two years. That tells us that underlying price pressures are steadily easing.

Growth remains intact. Real GDP is expected to hold up, though nominal GDP may look less impressive simply because inflation is so low. Morgan Stanley has pegged nominal growth at 8.3 per cent for the year ahead.

What It Means For Borrowers And Savers

For borrowers, lower rates would be welcome. Home loans, personal loans, and business credit could all become a little cheaper. Even a small cut in equated monthly installments (EMIs) can make a difference, especially for households juggling multiple expenses.

For savers, though, it may not be good news. Deposit rates, small savings returns, and bond yields could drift lower if the RBI goes ahead with cuts. Those who rely heavily on interest income may have to explore alternatives that can protect their returns.

The risk, of course, lies in how inflation behaves. A poor monsoon or supply shocks could push food prices higher. Global commodity markets and currency movements remain unpredictable. Any of these could make the RBI rethink its easing stance.

Outlook

For now, the disinflation trend is strong enough to support rate cuts. If Morgan Stanley is right, borrowers may get some relief while savers face thinner returns. But with inflation risks never too far away, the central bank will tread carefully. The next few months will show whether this path of low inflation — and lower rates — is here to stay.