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Informist, Wednesday, Mar. 12, 2025

 

By Shubham Rana

 

NEW DELHI – India's headline retail inflation declined for the fourth month in a row in February to 3.61%, falling below the Reserve Bank of India's medium-term target of 4.00?ter a gap of five months. Such has been the drop in inflation that it is worth asking the question if the Monetary Policy Committee can lower interest rates by more than the usual 25 basis points at its next meeting in April.

 

As per statistics ministry data released Wednesday, CPI inflation fell to a seven-month low in February thanks to vegetable inflation--which has been the proverbial pain in policymakers' necks--falling below zero. Prices of most other food items were also well-behaved, helping drag down food inflation to a 21-month low of 3.75%.

 

The sub-4% inflation figure in February is only the third time since September 2019 that prices have increased by less than 4% year-on-year in any month. But unlike in Jul-Aug 2024, the fall in inflation in February was not entirely due to a favourable base effect.

 

An extraordinary rise in prices in what remains of March notwithstanding, inflation in Jan-Mar should significantly undershoot the RBI's forecast of 4.4%. To even meet the forecast, inflation must jump to at least 5.2% this month. Economists, however, think March could see inflation staying below 4%. And with the RBI predicting inflation may average 3.8-4.0% in the first two quarters of 2025-26 (Apr-Mar), could the MPC defy market expectations and support growth more aggressively by lowering the repo rate by more than 25 bps next month?

 

OUTSIZED RATE CUT

The suggestion of a larger-than-usual rate cut is not new. In the minutes of the Feb 5-7 meeting, external member Nagesh Kumar said the committee could be "more ambitious" and lower the policy rate by 50 bps. "It would send a signal to the markets and private investors within and outside the country that India is serious and would do whatever it takes to revive economic growth momentum," Kumar had said.

 

While the MPC went for the traditional 25 bps rate cut last month as it lowered the repo rate for the first time in nearly five years to 6.25%, the easing room that has been created since Feb. 7 has been larger than anticipated.

 

"...we see Q4 FY25 (Jan-Mar) inflation averaging 3.9%, around 50 bps lower than the MPC's forecast. Such wide downside risk to the MPC's estimate offers sizeable room to deliver a second consecutive policy repo rate cut on Apr. 9," Aastha Gudwani, India Chief Economist, Barclays, said in a note. "While our base case remains that the MPC will deliver another 25 bps cut at the April meeting and retain the 'neutral' stance of monetary policy, we now think there is a possibility of a larger, non-standard 35 bps cut at that meeting," Gudwani noted.

 

SUPPORTING GROWTH

That the Indian central bank is serious about supporting growth can be gauged by the fact that it has supplemented last month's rate cut with a massive amount of liquidity infusion in the banking system to ease financial conditions. If one starts with December's Cash Reserve Ratio cut, the central bank is on track to inject nearly INR 8 trillion of durable liquidity by the end of March.

 

Activity levels are far from robust with GDP growth in Jan-Mar likely to be lower anywhere between 50-100 bps than the 7.6% implied by the statistics ministry's second advance estimate, which sees FY25 growth at 6.5%. IDBI Bank's nowcast sees growth in Jan-Mar at a mere 5.8% in the current quarter. In such a scenario, a rate cut of more than 25 bps could go a long way in sending the signal voiced by Nagesh Kumar.

 

To be sure, there are upside risks to inflation. In the latest CPI data, edible oil inflation remained high while core inflation rose to a 15-month high of 4.0%, led by higher gold prices. But as external member Saugata Bhattacharya said after the CPI data was released, despite all the risks, "the inflation path probably opens up more space for additional easing".

 

That the MPC will cut the repo rate on Apr. 9 seems to be a foregone conclusion. Perhaps bets should now be placed on what will be the size of the rate cut.  End

 

Edited by Ashish Shirke

 

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