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Informist, Tuesday, Apr. 15, 2025

 

By Shubham Rana

 

NEW DELHI – India's retail inflation fell more than expected in March, plunging to a 67-month low of 3.34%. This will not only provide reassurance to the Reserve Bank of India's Monetary Policy Committee that inflation is well under control, but may have also created the space for larger and deeper interest rate cuts, economists said.

 

At 3.7%, average CPI inflation in Jan-Mar has significantly undershot the RBI's forecast of 4.4% made in February. Even the average for 2024-25 (Apr-Mar) has come in at 4.6%, 20 basis points lower than the central bank's projection of 4.8%, also made in February.

 

Though food inflation dropped to a 40-month low of 2.69% and drove down the headline figure, core inflation edged up only slightly to 4.1%. Even if the latter continues to inch up over the coming months, it is the outlook for food prices, especially those of perishable items such as vegetables, that gives economists confidence that even the summer may not be an obstacle for further interest rate cuts.

 

"With multi-year low inflation this month and benign inflation expectations going forward, we expect rate cuts of 50 bps in June and August," said Soumya Kanti Ghosh, group chief economic adviser of State Bank of India. Ghosh added that any impact of heat waves could be looked through considering the benign price trajectory.

 

Helping matters is the India Meteorological Department's forecast, also on Tuesday, of an above-normal southwest monsoon this year. Of course, this is only an initial estimate, with Aditi Nayar, chief economist at ICRA, warning that while encouraging, the timing and distribution of rains will be crucial for agricultural output and food inflation.

 

On the whole, the inflation outlook is the rosiest it has been in years. According to Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, India's inflation trajectory is "well anchored below 4%" over the next 6-9 months. At a time of downside risks to growth, Bhardwaj sees the MPC cutting the repo rate by another 75-100 bps after last week's rate cut that took the policy rate to 6.00%.

 

To be sure, the MPC's decision to also loosen its stance to accommodative from neutral had already amped up expectations of more easing than previously anticipated. And the March CPI data has only strengthened these expectations.

 

Most economists now expect at least two more rate cuts this year, which would bring down the repo rate to 5.50% with chances of it being reduced even further if risks to growth are greater than currently estimated. And the RBI is likely underestimating these risks, with its GDP growth forecast of 6.5% for FY26 and 6.7% for FY27 significantly higher than what economists from outside the central bank are projecting.

 

On Monday, Morgan Stanley cuts its FY26 growth forecast for India to 6.1% and to 6.3% for next year in light of the direct and indirect risks to activity from the uncertainty and global slowdown being caused by US' volatile trade policies. Even more pessimistic than Morgan Stanley is Nomura, which expects India's GDP growth to slide to 5.8% this year.

 

Key to stimulating growth will be lowering real interest rates, which remain elevated despite the 50 bps of rate cuts announced so far in 2025. Over the last couple of years, several MPC members were of the opinion that a real rate of around 1% was enough to keep inflation at target without hurting growth.

 

The real policy rate has now risen to more than 2.5%--something that external member Saugata Bhattacharya had warned in February when he said the repo rate "might soon, if not even as of now, become excessively restrictive" given the RBI's inflation forecast trajectory. Since then, inflation has fallen more than the repo rate.

 

And even if it rises in April--which would be the last CPI print available to the MPC before it meets next in early June--it may not breach 4%. This would mean a real policy rate of around 2%--going by RBI Governor Sanjay Malhotra's formula--which would be much higher than what is considered appropriate to stimulate growth. This potentially opens up space for a larger 50 bps rate cut in June.

 

India's, and global, growth and inflation dynamics have presented conditions that monetary policy has often been hard-pressed to find. Now it can either choose to bite the bullet and deliver a larger than usual rate cut or err on the side of caution, as it is wont to do.  End

 

Edited by Ashish Shirke

 

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