Mumbai, Nov 19 : Leading global financial services firm Morgan Stanley expects the Reserve Bank of India (RBI) to reduce the repo rate by 25 basis points to 5.25 per cent at its monetary policy committee (MPC) meeting, scheduled for the first week of 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.

The report states that RBI 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 would give the RBI room to assess how these changes interact with domestic growth patterns and inflation indicators before deciding on any future action.

Regarding the countryâ??s fiscal policy, 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 are necessary for sustaining medium-term economic expansion, the report maintained.

Morgan Stanley expects Indiaâ??s headline CPI to rise slightly in 2026-27 from the lower levels anticipated in 2025, while eventually gravitating towards the RBIâ??s medium-term target of 4 per cent.

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, it further observes.

As far as the external sector is concerned, Morgan Stanley expects Indiaâ??s current account deficit to stay under control in a range near or below 1 per cent of GDP. Despite global trade disruptions, services exports remain steady, keeping Indiaâ??s global share at 5.1 per cent. Indiaâ??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 ratio, the report added.

Meanwhile, the RBI has upgraded its GDP forecast for FY26 to 6.8 per cent year-on-year from 6.5 per cent earlier, it also indicated a potential moderation in growth in the first half of FY26 due to trade and tariff-related headwinds. The RBI also lowered its headline CPI inflation forecast for FY26 to 2.6 per cent from 3.1 per cent earlier.

/IANS