The latest retail inflation print has brought good news not just for consumers, but also borrowers. India's CPI (consumer price index) inflation eased to a seven month low of 3.61 per cent in February, below Reserve Bank of India's 4 per cent target, aided by declining vegetable prices. This, analysts say, will firmly set the RBI to cut interest rates by upto at least 75 basis points in the coming months.
Throughout 2024, the RBI monetary policy committee had left the benchmark repo rate unchanged at 6.50 per cent, worried over CPI inflation staying high. In the MPC meeting in February, the first under new Governor Sanjay Malhotra, the benchmark rate at which the RBI lends funds to commercial banks was reduced by 25 basis points (0.25 per cent). This was the first repo rate cut in almost five years.
With inflation now doused, analysts see another rate cut of 25 basis points in the next MPC meet in April and more to follow later. This coupled with the various liquidity enhancing measures announced by the central bank over the last few weeks should give a much needed boost to GDP growth.
GDP rebounded in the October-December quarter to 6.2 per cent after a sharp slowdown in July-September at 5.6 per cent. But, the 6.5 per cent-odd expected growth in the full year, will be nowhere close to the revised 9.2 per cent growth in 2023-24.
"Low inflation and below-trend growth mean current policy rates are restrictive. We continue to expect 75 bps of further cuts to a terminal rate of 5.50 per cent by end-2025," opined Sonal Varma, Nomura's chief economist for India and Asia (ex-Japan).
A key driver for the fall in CPI has been the decline in food prices. Food inflation was led by sliding vegetable CPI, slipping into negative territory to 1.07 per cent after 20 months, with 80 per cent of such decline attributed to three vegetables—garlic, potato, and tomato, pointed out Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.
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While food inflation is likely to aid CPI in coming months too, imported inflation due to the depreciation in rupee, in turn driving a rise in price of metals, oils and certain chemicals, could put some upward pressure on inflation. US President Donald Trump's announcement of reciprocal tariffs and its potential impact on India will have to be watched out for too.
Ghosh sees CPI inflation coming down at 3.9 per cent in the current (January-March) quarter and averaging 4.7 per cent in the current financial year ending March 31, 2025. In the next financial year, he expects inflation to be around 4.0-4.2 per cent.
"With benign inflation this month and going forward, we expect a cumulative rate cut over the cycle could be at least 75 basis points. With an intervening gap in August 2025, the rate cuts cycle could restart from October," said Ghosh.
Dipti Deshpande, principal economist at CRISIL is also expecting another 50-75 bps rate cut next financial year. Softer inflation should help inflation average 4.4 per cent next year, compared with 4.7 per cent this year, she projects.
"In coming months, we expect food inflation to remain soft, supported by healthy crop output, benign global prices and a high base of fiscal 2025. Non-food inflation could see a slight uptick due to a low base and the impact of a weaker rupee," said Deshpande.
Radhika Rao, senior economist at DBS has maintained her projection of another 50 bps in rate cuts by the RBI, while she feels the MPC may also explore a change in stance (currently it is neutral).
"A multipronged support framework has been initiated, via monetary policy, liquidity, macroprudential easing and fiscal boost," noted Rao.
The Reserve Bank had earlier this month announced various measures, including purchase of government securities worth Rs 1 lakh crore, to enhance liquidity in the banking system.
Last month, RBI had also decided to reverse the earlier decision taken to raise risk weights on bank loans to NBFCs (non-banking financial companies), a move that would release substantial amount of capital.
While a weak rupee has not been a constraint on the easing cycle, the reciprocal tariffs likely in April are likely to be an event risk for the markets, felt Rao.
