The Reserve Bank of India (RBI) kept the repo rate steady at 5.5% in its October 2025 monetary policy meeting, disappointing many who hoped for a rate cut following GST reductions. However, US-based global brokerage firm Morgan Stanley predicts that the RBI will likely reduce the policy rate by 25 basis points (bps) in December 2025, with a further cut expected in February 2026, potentially bringing the repo rate down to 5%.

Key Reasons Behind the Predicted Rate Cut

• Inflation Trends:
  Morgan Stanley projects headline Consumer Price Index (CPI) inflation to average around 2.4% in FY26, well below the RBI’s target of 4%. Core inflation has remained subdued, and food price softness coupled with recent GST cuts is expected to sustain this benign trend.

• Economic Growth:
  While real GDP growth remains steady, nominal GDP is slowing due to weak price trends. External risks like trade tensions with the US and tariff impacts also weigh on growth prospects.

• Policy Space:
  Given the low inflation environment and moderate growth, Morgan Stanley believes the RBI has room to ease monetary policy to support consumption and investment.

• Monetary Policy Transmission:
  The firm argues that monetary policy impacts take time to materialize, so an earlier cut could have delivered more timely stimulus; therefore, December is seen as the appropriate time to start easing.

Implications of the Rate Cut

A potential repo rate reduction to 5% could lead to lower borrowing costs for consumers and businesses, boosting sectors like housing, automobiles, and infrastructure. It may also increase credit demand ahead of the new financial year.

Summary

Morgan Stanley stresses that the RBI will monitor global interest rate movements and commodity prices before finalizing the pace of easing. The possibility of a deeper rate cut cycle remains if inflation remains soft for an extended period.