Morgan Stanley predicts inflation to fall to 4.5 percent

According to a Morgan Stanley report, the inflation in India is expected to fall to 4.5 percent by the quarter ending this fiscal year.

The report suggests that this in turn could give the Reserve Bank of India (RBI) space to cut key policy rates by 50 basis points.

The global financial services major said that disinflationary pressures would keep the RBI on an easing path.

"We expect a 50 bps cut in the policy rate by quarter ended March 2017," the Morgan Stanley report stated.

In the June policy review meet, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

The report further noted that inflation is expected to fall to 4.5 percent by quarter ended March 2017.

Morgan Stanley further said that fall in inflation would be largely because of key drivers including commodity prices, wage costs and fiscal consolidation. With the property prices remaining at benign levels, this in turn would give the RBI space to cut policy rates by another 50 bps by quarter ending March 2017.

"We expect macro-stability conditions to be maintained as the recovery is expected to be driven by a rise in productivity, with a low risk of the economy overheating," it added.

Meanwhile, the wholesale inflation accelerated for the third straight month in June hitting 1.62 percent on costlier food and manufactured items.

It follows an uptick in retail inflation, which hit a 22-month high of 5.77 percent in June, dampening chances of a rate cut by the RBI in the policy meet scheduled for August 9.