Easing Inflation Strengthens Case for April Rate Cut by RBI

Retail Inflation Drops to 3.61%, Raising Expectations of Monetary Policy Easing

Retail inflation in India fell to a seven-month low of 3.61% in February, fueled by a continued decline in food inflation, according to data released by the government on March 12. The lower-than-expected Consumer Price Index (CPI) inflation, which is also below the Reserve Bank of India’s (RBI) medium-term target of 4%, has intensified expectations of an interest rate cut in April.

With this data supporting a dovish stance by the central bank, economists foresee a possible 25 basis points (bps) cut in the April monetary policy meeting, with another 25 bps cut potentially following in June.

Highlights:

✔ India’s retail inflation eases to 3.61% in February, a seven-month low
✔ Food inflation falls below 6% for the first time since September 2024
✔ RBI may infuse ₹2 lakh crore liquidity in FY26 to support rate transmission
✔ Economists predict a 25 bps rate cut in April, with a further 25 bps cut likely in June
✔ RBI’s monetary policy committee (MPC) acknowledges a shift in domestic growth and inflation balance

India’s Retail Inflation Falls Below 4% for the Third Time in FY25

Food Prices See Major Relief, Strengthening Rate Cut Prospects

The decline in headline inflation to 3.61% in February marks only the third instance in FY25 where inflation has slipped below the 4% target set by the RBI. This inflation figure was lower than the market consensus, as the median estimate of 19 economists polled by MC had projected inflation at 3.8%.

One of the major contributors to the easing inflation trend has been falling food prices. Food inflation dropped below 6% for the first time since September 2024, extending its decline from January’s reading of 6% year-on-year. The continued easing of food inflation has provided further room for monetary policy easing.

Market analysts believe that with inflation cooling faster than expected, the RBI’s monetary policy committee (MPC) may shift its focus toward supporting economic growth through rate cuts and liquidity measures.

Economists Expect RBI to Cut Rates in April and June

Monetary Policy Easing Likely Amid Growth Concerns

With inflation easing faster than projected, economists believe that the RBI has enough room to consider rate cuts sooner than previously expected.

Expert Forecasts on Rate Cuts:

• Gaura Sengupta, Economist at IDFC First Bank, said:
  “We see space for further monetary policy easing by RBI. We expect a 25 bps cut in April and another 25 bps cut in June.”
• Madhavi Arora, Lead Economist at Emkay Global Financial Services, stated:
  “Despite some core inflation concerns, the CPI surprise suggests that inflation in Q4 FY25 could undershoot the RBI’s forecast by more than 40 bps. This strengthens the case for an April rate cut, which was also reflected in the recent dovish policy minutes.”

The RBI had last cut the repo rate by 25 bps in February, bringing it down to 6.25%, while keeping the Standing Deposit Facility (SDF), Marginal Standing Facility (MSF), and Bank Rates unchanged at 6.5%.

Between May 2022 and February 2023, the RBI hiked rates by 250 bps in a bid to curb inflation. However, since April 2023, the repo rate has remained steady at 6.5% as the central bank focused on controlling inflation and bringing it toward its medium-term target of 4%.

RBI May Infuse ₹2 Lakh Crore in FY26 to Support Liquidity

Monetary Easing to Aid Transmission of Rate Cuts

Beyond rate cuts, economists expect RBI to announce further liquidity measures to ensure the effective transmission of monetary policy.

• The central bank could inject ₹2 lakh crore into the financial system in FY26, according to market experts.
• This liquidity infusion is expected to ease the tightness in the banking system, which has been affected by:
  • Slower government spending
  • RBI’s foreign exchange interventions
  • Heavy foreign portfolio investor (FPI) outflows from Indian equities

According to Gaura Sengupta,
“We expect further liquidity infusion of ₹2 lakh crore in FY26 to ensure system liquidity remains positive. This is essential for the smooth transmission of rate cuts.”

In the past few months, the RBI has injected nearly ₹3 lakh crore of durable liquidity through Variable Rate Repo (VRR) auctions, Open Market Operations (OMOs), and forex swaps to stabilize the banking system.

RBI Officials Signal Shift Toward a More Dovish Policy Stance

MPC Minutes Indicate Concern Over Growth & Favorable Inflation Trends

The minutes from RBI’s February monetary policy meeting suggest that members of the Monetary Policy Committee (MPC) are leaning toward a dovish stance due to slower economic growth and easing inflation.

• Deputy Governor M Rajeshwar Rao emphasized that:
  “Since the December 2024 policy, there has been a shift in the growth-inflation balance. While inflation is softening, growth outcomes have been weaker. Rising global market uncertainties and trade policies further cloud India’s growth outlook.”

• RBI Governor Sanjay Malhotra also hinted at a lower policy rate in the near term:
  “Given the macroeconomic outlook, where inflation is aligning with the target, and monetary policy is forward-looking, I believe a lower policy rate is appropriate at this juncture.”

Investors and Policymakers?

With inflation below the 4% target and economic growth concerns rising, all eyes are on the RBI’s April monetary policy meeting. Key factors to monitor include:

✔ The RBI’s stance on repo rate cuts (25 bps cut expected in April)
✔ The scale of liquidity infusion measures (₹2 lakh crore in FY26 projected)
✔ Global financial market trends and their impact on Indian trade and growth
✔ Foreign portfolio investor (FPI) flows into Indian markets

With inflation cooling and growth risks rising, the RBI has a window to shift toward policy easing, a move that could benefit borrowers and the broader economy in the coming quarters.