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Informist, Thursday, Mar. 13, 2025

 

By Shubham Rana

 

NEW DELHI - Successive lower-than-expected CPI prints have brightened the outlook for rate cuts in India, leading to expectations that the Reserve Bank of India's Monetary Policy Committee could lower interest rates by much more than previously thought.

 

India's CPI inflation fell to a seven-month low of 3.61% in February from 4.26% in January, according to government data released Wednesday. This was only the third time since September 2019 that inflation fell below the RBI's medium-term target of 4%.

 

Inflation has now averaged 3.9% in Jan-Feb and, according to economists, is on track to miss the RBI's 4.4% forecast for Jan-Mar by nearly 50 basis points. "We expect benign inflation readings to sustain," economists at Nomura said in a report. "Headline inflation is likely to rise to around 3.8% in March, but higher crop output, subdued demand and low manufacturing costs should keep CPI inflation below 4% in H1 2025 (Apr-Sept) and average 4.2% in FY26."

 

The central bank itself projects inflation to stay under control throughout 2025-26--it projects next year's inflation at 4.2% with quarterly prints seen between 3.8% and 4.5%.

 

"The RBI had commenced its rate-easing cycle with a 25 bps cut in February, and a likely inflation undershoot of 40-50 bps in Q4FY25 (Jan-Mar) will keep an April rate cut in play, as also reflected in the dovish tone of the February meeting minutes," Madhavi Arora, chief economist at Emkay Global Financial Services, said in a report.

 

The MPC had lowered the repo rate in February, a first in nearly five years, after GDP growth fell to a seven-quarter low of 5.4% in Jul-Sept and the government's first advance estimate pegged FY25 growth at a four-year low of 6.4%. While economic activity has rebounded from the low seen in Jul-Sept--it rose to 6.2% in Oct-Dec and both Jul-Sept and FY25 growth figures were raised by 20 and 10 bps, respectively--it remains far from robust.

 

Economists and markets have been expecting another 25 bps rate cut in April since the February meeting of the MPC, but views were split on the extent of easing post April. Most economists earlier expected 50-75 bps of easing at the most but now the consensus has shifted to around 100 bps of rate cuts, including the February action.

 

"Based on our growth-inflation mix and the RBI's focus on growth, we expect another 50 bps of rate cuts by the June policy with room for another 25-50 bps of cuts contingent on how the adverse domestic and global risks pan out," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said in a report. State Bank of India's Soumya Kanti Ghosh noted that the MPC could lower rates in April and June, take a breather in August, and deliver another cut in October.

 

Not only are more rate cuts priced in for 2025 after Wednesday's inflation data, some have even talked bigger quantum of cuts. Barclays India Chief Economist Aastha Gudwani Wednesday said there is a possibility of a larger, non-standard 35 bps rate cut at the April meeting.  End

 

Edited by Vandana Hingorani

 

 

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