“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,” the report said. If this reduction takes place, the repo rate will fall to 5.25 per cent in December.
The report said the broader policy stance is likely to stay prudent, with the central bank poised to become data-dependent once this step is taken. It added that the bank is expected to adopt a wait-and-watch position as it evaluates its three-pronged easing cycle covering interest rates, liquidity conditions, and regulatory measures. This approach, it said, will give the RBI room to assess how these changes interact with domestic growth patterns and inflation indicators before deciding on any future action.
On the fiscal side, the report said the government is likely to continue following fiscal pragmatism, focusing on gradual consolidation while still giving priority to capital expenditure. These measures, Morgan Stanley said, are necessary for sustaining medium-term economic expansion.
The report outlined its inflation forecast as well. It expects headline CPI to rise slightly in 2026-27 from the lower levels anticipated in 2025, eventually settling close to the RBI’s medium-term target of 4 per cent. Food prices within CPI, it said, may be influenced partly by a weak base, while core inflation is expected to remain steady. It estimated that both food and core inflation will move towards 4 to 4.2 per cent year-on-year. With this alignment, inflation expectations should remain anchored and help consumer sentiment.
On external metrics, the firm expects India’s current account deficit to stay within a range near or below 1 per cent without showing major widening. It added that India’s external balance sheet continues to appear robust at present and stable, supported by foreign exchange reserves, adequate import cover, and low external debt-to-GDP ratios.