RBI MPC Likely To Open Door To Further Rate Cuts As Food Prices Ease, Say Economists

India's retail inflation, which moderated to 4.31% in January from 5.22% in December, opens the door for a rate cut as food prices continue to cool.

The Monetary Policy Committee had cut the benchmark lending rate by 25 basis points to 6.25%—its first rate cut in nearly five years. Going ahead, food inflation pressures, absent any supply-side shock, should see a significant softening, with the RBI projecting inflation at 4.4% for the fourth quarter of fiscal 2024-25. Further easing in inflation could mean more policy space for the MPC to support growth with additional rate cuts.

High-frequency price data for February 2025 continues to show softening in key vegetable prices, with the downward trend persisting at a steeper pace, according to Dipanwita Mazumdar, economist at Bank of Baroda. Core inflation is also insulated, with recent company earnings pointing to a skewed demand recovery concentrated in a few segments. Thus, an easing CPI print is comforting from a monetary policy standpoint, especially when global uncertainty poses significant ambiguity in terms of currency, liquidity, and upcoming monetary policy responses, she explained.

The growth-inflation outlook suggests room for another 25-basis-point rate cut in either the April or June 2025 meetings, according to Aditi Nayar, chief economist at ICRA. The exact timing would depend on incoming data, global developments, and movements in the rupee against the US dollar, Nayar said.

Liquidity measures will also need to be adequate to enable better transmission, said Radhika Rao, senior economist at DBS Bank, who expects a 25-basis-point rate cut in April. While no fresh measures on liquidity were announced at last week’s rate review, this week’s action reinforces that the central bank will tweak its response mechanism in tune with evolving conditions, especially to sterilise intervention moves, she explained.

More liquidity measures are likely in the pipeline, including longer-tenor foreign exchange swaps and open market operations heading towards the end of the fiscal year and early next fiscal, according to Rao. Besides intervention, a reversal in the balance of payments from surplus to deficit from the fourth quarter onwards, on the back of portfolio outflows and thinner net FDI inflows, has also added to the squeeze, she said.