India’s retail inflation dropped to a seven-month low of 3.61% in February, strengthening expectations of further rate cuts by the Reserve Bank of India (RBI) in 2025.
UBS India projects a 50-basis-point cut in the repo rate during the ongoing monetary policy cycle, with the next reduction anticipated in the April meeting of the RBI’s Monetary Policy Committee (MPC). Meanwhile, an SBI Research report suggests the RBI could lower rates by a cumulative 100 basis points this year if inflation remains subdued.
UBS India highlighted that with inflation easing and cyclical recovery underway, monetary policy support through rate cuts, liquidity measures, and regulatory easing could further bolster domestic growth. The firm expects headline CPI inflation to average 4.2% in FY26, down from an estimated 4.7% in FY25.
The latest data shows food prices, particularly vegetables, continue to soften, alongside a decline in pulses and cereals. However, concerns remain about rising temperatures in March potentially impacting winter crop yields, including wheat and rapeseed.
What SBI Research says
SBI Research’s Ecowrap report predicts that the RBI may implement a 25-basis-point rate cut in April, followed by another in June and a possible third in October, totaling 100 basis points over the year.
The forecast is based on inflation remaining below the central bank’s 4% target, supported by moderating food prices and stable core inflation. The report also pointed to a 6.8% growth in industrial production and stable corporate earnings as positive indicators for the economy.
The latest inflation data from the National Statistical Office (NSO) revealed a sharp drop in the Consumer Price Index (CPI)-based inflation from 4.26% in January to 3.61% in February, marking the lowest level since July 2024.
Food inflation, as measured by the Consumer Food Price Index (CFPI), fell to 3.75% from 5.97% the previous month. Core inflation, however, edged up to 4% in February from 3.7% in January, driven by higher gold prices and a marginal rise in core services inflation.
In February, the RBI cut the repo rate by 25 basis points to 6.25%, its first reduction since the COVID-induced cuts in 2020. RBI Governor Sanjay Malhotra stated that the rate-setting panel would maintain a neutral stance while assessing economic conditions. The central bank had last hiked rates in May 2022 to combat inflation amid global economic disruptions from the Russia-Ukraine war, before pausing in May 2023.
With the next MPC meeting scheduled for April 7-9, market participants will closely watch for signals of a potential policy pivot. A rate cut could lower borrowing costs, spur investment, and provide relief to consumers facing high loan interest rates.
