CPI inflation falling for third consecutive month opens room for the Reserve Bank of India to cut rates again in April

On February 7, the Reserve Bank of India cut the repo rate by 25 basis points, which was a big relief to borrowers. This reduction from 6.50 per cent to 6.25 per cent was the first in nearly five years, with the RBI Governor Sanjay Malhotra arguing that growth-inflation dynamics had opened up policy space for the monetary policy committee to support growth.

Inflation further falling towards the central bank's 4 per cent target in January will open more space for interest rate cut in April, say economists.

The latest CPI (consumer price index) data shows inflation eased to 4.31 per cent last month from 5.22 per cent in December. This decline was aided by a sharp fall in food inflation, especially vegetable prices.

Food inflation cooled to 6.02 per cent in January from 8.39 per cent in the month before.

CPI inflation fell for the third consecutive month, with a sharp 15.7 per cent month-on-month fall in vegetable prices on improved supplies, driving much of the decline in food and headline inflation.

"The RBI commenced its rate-easing cycle with a 25 bps cut earlier this month as expected, as policy trade-offs turned less challenging with tepid underlying growth, easing inflation concerns, and a perceptible change in the RBI's rupee management approach. However, the stance was understandably maintained at neutral as policymakers prefer maintaining flexibility on rates and liquidity management, and not to be tied uni-directionally, given the fluid global dynamics that may also require them to be more nimble on policy responses for ensuring financial and macro-economic stability," said Madhavi Arora, lead economist at Emkay Global Financial Services. She is expecting 25-50 bps of further easing.

While vegetable prices have eased, it worth noting is that prices of fruits have gone up. Also, edible oil prices have now emerged as a pressure point for food inflation, pointed Dharmakirti Joshi, chief economist at CRISIL.

Inflation in this category hit a 33-month high of 15.6 per cent in January, impacted by high global prices and import duties, he noted.

"Since around 60 per cent of edible oil is imported, weakening currency also adversely impacts its price," said Joshi.

Core inflation too has marginally increased due to higher gold prices, point analysts.

"The recent depreciation in the rupee has increased the risk of imported inflation and will have to be monitored," said Joshi. He expects retail inflation to average 4.4 per cent in 2025-2026, compared to the projection of 4.7 per cent for the current year.

With economic growth slowing this year,  the central bank will ease rates, but clearly, economists are not expecting deep cuts, given the volatile global macroeconomic situation and the emerging pressure points.

Radhika Rao, executive director and senior economist at DBS Bank sees another 25 bps rate cut in the April MPC meeting. She expects the central bank will take more measures to infuse liquidity in the banking system.

The inflation trajectory will remain benign in the months ahead providing room for another 25 bps of rate cut, noted Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

"However, the pace of rupee depreciation will need to be closely watched for spillovers on domestic inflation," she said.

Akhil Mittal, senior fund manager – fixed income at Tata Asset Management, also feels RBI will cut rates by another 25 bps in April.

Early price trends in February show continued moderation in vegetable prices and this could drive inflation close to 4 per cent for the month, he pointed.

"We believe RBI would breathe a sigh of relief on the inflation front and put greater emphasis on growth going forward," he said.