New Delhi, Sep 15 : India's inflation rate, based on the Consumer Price Index (CPI), is expected to remain low due to GST rate cuts and the decline in food prices which will give the Central Bank headroom to reduce the policy rates by another 0.5 per cent (50 bps) this year, according to a Morgan Stanley report released on Monday.

'The benign trend in headline CPI is likely to be perpetuated further by disinflationary impulses from low food prices, GST rate cuts and lack of input price pressures. As such, we expect headline CPI to average at 2.4 per cent year-on-year in FY26, allowing the RBI to cut rates by 25 bps (0.25 per cent) each in October and December,' the report stated.

Headline CPI inflation is tracking below RBI's target of 4 per cent for the last seven months, partly driven by food price disinflation. However, core inflation remains range bound tracking at 4.2 per cent while core inflation is at 3.1 per cent and below 4 per cent for the last 22 months, indicating sustained moderation in underlying inflation, the report pointed out.

The disinflationary impulse is likely led by a combination of drivers that include persistent softness in food prices and supportive outlook driven by better crop production and GST rationalisation is expected to lead to a downward bias to the aggregate price levels, with our sensitivity analysis indicating a 50-60 bps impact,' the report further stated.

Against this backdrop, the report expects headline CPI to average 2.6 per cent year-on-year in the second half of financial year 2025-26, and at 2.4 per cent for the full financial year.

However, it cautioned that while lower indirect taxes will likely boost domestic demand from a low base in the second half of 2025-26, there is need to be watchful of the impact of drag from external demand, due to adverse tariffs and trend contingent on ongoing negotiations with the US.

"We remain watchful of the trend in monsoon and its impact on the standing summer crop; impact of GST rationalisation on consumption and pass-through to inflation; external factors, such as trade/tariff impact on growth and capital flows and Fed's rate easing," it mentioned.

/IANS