Morgan Stanley prunes FY26 India growth forecast to 6.1%

Morgan Stanley on Tuesday lowered its growth forecast for India by 40 basis points to 6.1% for 2025-26 citing changes in trade and tariff policies. The US-headquartered financial services company also said it now expects a slower recovery in 2026-27, at 6.3%, compared to its earlier outlook of steady growth of 6.5%.

A basis point is a hundredth of a percentage point.

In a research report on India Economics and Strategy, it said growth will trough in the December 2025 quarter to 5.7% compared to 6.2% a year earlier. “This reflects uncertainty stemming from changes in trade and tariff policies which weigh on external demand and business sentiment, hampering the capex cycle,” it said.

However, Morgan Stanley expects inflation to be benign and average 4% in this financial year, with the trend in the next few months remaining decisively below the 4% mark. “We see lower food inflation and lower oil prices keeping food and non-food inflation at benign levels,” it said.

Slower growth and lower inflation, it said, should allow the Reserve Bank of India (RBI) to respond with a deeper easing cycle, of a cumulative 100 basis points, and two more interest rate cuts in 2025.

“A deeper-than-expected downturn would likely lead to more easing by the RBI and potentially a pause in the fiscal deficit consolidation for F2026,” the report said.It said risks to the growth outlook are skewed to the downside, mainly driven by an even deeper slowdown in global growth.”Risks from global capital flows or volatility in currency could make it more challenging for policymakers to address growth risks,” it said, adding that the growth trajectory could improve by resolving the uncertainty caused by changes in tariff policies if the US were to strike a deal with China in a timely manner.