Economists Bat For February Rate Cut Amid Easing Inflation, Slower Economic Growth

With retail inflation on an easing trajectory, and economic growth showing signs of a slowdown, economists expect that the Monetary Policy Committee is likely to cut rates at its meet in February.

India's retail inflation moderated to a four-month low of 5.22% in December from 5.48% in November, due to prices of vegetables cooling to 26.56% from 29.33% in the same duration. This inflation print is the last before the MPC's meet between Feb. 5-7.

Preliminary estimates for January CPI inflation is tracking at 4.5%, after building-in sharper decline in food prices, according to estimates by Gaura Sengupta, economist at IDFC First bank. Daily food prices for the first two weeks of January, indicate that pace of decline in vegetable prices has accelerated, with vegetable prices tracking lower by 13.9% year-on-year in January, compared to a decline of 8.2% in December, as per the National Horticulture Board.

When the RBI meets in February it will face a growth-inflation dynamic, which supports easing of policy rate. While, the FY26 CPI inflation estimate is averaging below target levels. Persistently subdued core inflation confirms that the economy’s growth is below potential. High frequency indicators in Q3 FY25 are not showing a broad-based pick-up in growth momentum after a disappointing Q2 GDP print. Three factors have resulted in moderation in growth momentum—tight monetary policy, decline in government capital expenditure and slowdown in credit impulse.

Full year FY25 GDP growth is expected at 6.3%, compared to RBI’s estimate of 6.6%. Hence domestic conditions warrant easing of monetary policy rate.

A change of guard at the RBI also implies that the possibility of the majority voting for a rate cut at the next MPC is significantly higher from the two members in the last MPC meeting, stated a research note by Teresa John, economist at Nirmal Bang Institutional Equities.

"The moderation in inflation, along with prospects of it aligning with 4% by the second half of FY26, is supportive of our Feb rate cut call," said Samiran Chakraborty, chief economist at Citi.

However, three external factors have created doubts. Deferment of Fed rate cut expectations, potential Trump tariffs led dollar strength, and US sanctions-on-Russia-led oil price spike has contributed to substantial rupee depreciation, he explained.

While some of this might be warranted from a valuation perspective, it could be an overhang for monetary easing, said Chakraborty. "We would be firming up our Feb rate cut call, based on how some of these global factors pan out and observing the RBI’s policy measures to improve onshore INR liquidity as a possible signal, too," he said.