RBI likely to cut repo rate to 5.25% in December 2025: Morgan Stanley

A Morgan Stanley report predicts the RBI will cut the repo rate by 25 bps to 5.25% in December 2025 due to low CPI inflation. The central bank is then expected to adopt a 'wait and watch' stance to assess the impact of its policies.

The Reserve Bank of India (RBI) is expected to reduce the repo rate by 25 basis points in its upcoming December 2025 policy meeting, according to a recent report released by Morgan Stanley. The report highlighted that its expectation is driven mainly by continued downside surprises in headline Consumer Price Index (CPI) inflation. "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". If RBI eases rates in December, the repo rate will be reduced to 5.25 per cent.

According to the report, the policy response is likely to remain prudent. After this move, the central bank is expected to turn data-dependent and adopt a 'wait and watch' approach. This will allow the RBI to assess the combined impact of its three-pronged policy easing across rates, liquidity, and regulation. The central bank will also closely track the evolving domestic growth and inflation trends before taking further steps.

Fiscal Pragmatism to Continue

On the fiscal front, the report stated that the government is expected to maintain fiscal pragmatism. This includes focusing on gradual fiscal consolidation while continuing to prioritise capital expenditure. Such measures, Morgan Stanley noted, are important to support medium-term growth.

Inflation Outlook

The report also gave an inflation outlook. It expects headline CPI to rise slightly in 2026-27 from the low levels expected in 2025, eventually aligning with the RBI's medium-term inflation target of 4 per cent. Within CPI, food prices are likely to be partially affected by a weak base, while core inflation is expected to remain well-behaved. Both food and core CPI are projected to converge to 4-4.2 per cent year-on-year. With this convergence, inflation expectations are likely to stay anchored, which, according to the report, should support consumer sentiment.

Stable External Sector

On the external sector, Morgan Stanley expects India's current account deficit to remain range-bound at or below the 1 per cent mark, without widening significantly. It also noted that India's external balance sheet remains strong due to sufficient macro-stability buffers, including healthy foreign exchange reserves, adequate import cover, and low external debt-to-GDP levels.

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