Sharp Inflation Drop Prompts Economists To See RBI Terminal Rate At 5.25%

The Reserve Bank of India's terminal repo rate could fall to 5.25% in the current cycle, analysts predict, as inflation continues to surprise on the downside and the Monetary Policy Committee is expected to implement more rate cuts in 2025, driven by subdued inflation and manageable global risks.

Retail inflation in March eased to a six-year low at 3.3%, driven by a sharp drop in vegetable prices. This is below the Reserve Bank of India’s forecast for the fiscal 2024-25, which projects inflation at 4% for the year. Food inflation moderated to 2.9%, and vegetable inflation fell by 7%.

April CPI is tracking at 3.2–3.3%, according to Emkay Global’s Madhavi Arora, with food prices continuing to ease. Arora noted that the RBI’s forecast for the first quarter of the current fiscal, set at 3.6%, has downside risks of 20–30 basis points. She expects headline inflation for the ongoing fiscal to fall within 3.8–3.9%. Core inflation is also likely to remain subdued, around 4.1–4.2%, due to easing food prices and supply-side factors.

Economists now anticipate further rate cuts in the months ahead. Arora expects a 25 basis-point cut in June, with additional cuts possible later in the year, pushing the terminal rate down to 5.25%. This follows a broader consensus of a more dovish stance, as inflation pressures remain muted and global risks are manageable.

Nirmal Bang projects cumulative rate cuts of 100 basis points in 2025, with cuts likely in both June and August. Teresa John, an economist at Nirmal Bang, cited risks to growth as a key factor that could justify further easing.

"We expect cumulative rate cuts of at least 100 basis points in this cycle, pencilling in rate cuts in both June and August 2025," John said, adding, "We see potential for further cuts in case of any increase in downside risks to growth."

Barclays also sees more cuts ahead. Aastha Gudwani, India chief economist at Barclays, expects inflation to remain benign, forecasting two more rate cuts in 2025. “While seasonal factors may push vegetable prices higher, overall price pressures will stay under control,” she said.