Ebbing inflation cements April rate cut

A sharper than anticipated decline in inflation, improved liquidity conditions and fiscal consolidation will give the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) the headroom to cut the repo rate in April. Economists forecast another 50-75 basis points (bps) of rate cuts by the MPC over the next fiscal.

India’s February 2025 CPI inflation dipped below the RBI’s 4 per cent target to a seven-month low of 3.6 per cent in February from 4.3 per cent in January, driven by a slide in food inflation to 3.7 per cent, the lowest reading since May 2023.

While the on-month momentum in a number of food categories slowed, a high base effect also played a role in lowering food inflation. Prices of vegetables, eggs, pulses and spices fell on-year while many others saw softer inflation. On the other hand, core inflation crossed 4 per cent for the first time since November 2023 and touched 4.1 per cent (versus 3.6 per cent in January), as surging gold and silver prices pushed up inflation in the personal care and effects category.

On the other hand, the Index of Industrial Production (IIP) picked up to 5 per cent in January from 3.5 per cent in December (revised up from 3.2 per cent) driven by improving output growth in mining and manufacturing. January’s IIP pick-up ties in with the NSO’s expectations of faster gross domestic product (GDP) growth in the fourth quarter of this fiscal (7.6 per cent versus 6.2 per cent in the previous quarter). The NSO’s latest GDP estimates stands at 6.5 per cent for fiscal 2025.

The RBI has already embarked on a rate cutting cycle by cutting the repo rate by 25 basis points in its February policy from 6.5 per cent to 6.25 per cent to accelerate growth amid global uncertainties. It has also initiated a multipronged support framework via monetary policy, liquidity, macroprudential easing and fiscal boost. The liquidity balance which had been in deficit since December 2024, registering the widest gulf in January, and thereafter moderated to below Rs 2 lakh crore last month, and further to average Rs one lakh crore in March. RBI dividend payouts in May (estimates are around Rs 1.8 lakh crore to Rs 2 lakh crore) will also provide a durable boost to liquidity, besides higher government spending.

Meanwhile the rupee has depreciated by 4 per cent vs USD since October, which according to HSBC Research report could add 30 bps to inflation, going by the forex sensitivities. However, a benign outlook on oil prices (HSBC commodity forecast for Brent is USD73/b for 2025), and Chinese excess capacity is likely to keep a lid on core inflation.

“We retain our call for another 50 basis point cuts, with a next move in April. Change in stance will also be explored. Key risks are global uncertainties and tariff action,” said Radhika Rao, senior economist at DBS Bank.