Morgan Stanley Expects Retail Inflation To Climb Back To 4% By March 2026

Morgan Stanley expects India's retail inflation to climb back to around the 4% mark by the quarter ending March 2026. The brokerage forecasts inflation to ease to approximately 1.5% in July, before averaging between 2% and 2.5% in the quarters ending September and December.

The brokerage has lowered its Consumer Price Index forecast for FY26 to 3% from 3.5%, following a continued easing in headline inflation. In June, headline CPI slowed to 2.1% year-on-year from 2.8% in May — the lowest since Feb 2019. On a month-on-month basis, CPI remained flat for the third month in a row.

The brokerage still sees the likelihood of another rate cut of 25bps in the December quarter policy, driven by its expectation that domestic growth will be weaker than the RBI's estimate owing to a slowdown in global growth.

"With respect to policy response, even as near-term inflation will likely undershoot the RBl's current estimate, we expect a pause in the August policy meeting, mainly because of front-loaded policy action in June and with one-year forward inflation expected to remain at approximately 4%," it added.

While food CPI declined by 1.1% year-on-year in June, partly due to the base effect, CPI excluding vegetables dipped to 3.8% year-on-year. High frequency food price data for July suggests a mixed trend, though prices remain broadly benign at the aggregate level.

Morgan Stanley highlighted that the headline CPI is expected to further soften. Headline CPI for June was a tad below the brokerage's estimate at 2.2% and consensus 2.3%. As such, headline CPI averaged 2.7% in the quarter ending June, slightly lower than the RBI's estimate of 2.9%. "A favourable base effect and slower food inflation imply that near-term inflation will likely moderate further," it added.

As per the CPI data, fuel CPI edged down to 2.6% year-on-year in June from 2.8% in May, declining on a sequential basis. Core CPI (excluding food, fuel) rose marginally in June to 4.5% year-on-year as did core CPI (excluding gold, gasoline) to 3.6%.