February CPI Inflation Expected to Decline Further, Boosting RBI Rate Cut Prospects

Consumer Price Index (CPI) inflation eased to a five-month low of 4.31% in January, marking its third consecutive monthly decline. Experts and economists anticipate a continued downward trend, primarily driven by moderating food prices.

Data suggests that headline inflation could decrease further in February, largely due to lower prices of vegetables and pulses. "We expect core inflation pressures to remain largely contained in February across most categories, except for the impact of rising gold prices and some effects of a weaker currency," stated Japan-based brokerage firm Nomura Holdings.

Beyond February, a combination of strong crop yields and the government's proactive approach to controlling price surges is expected to keep food inflation in check throughout the year. "Regarding core inflation, we foresee downward pressure from subdued domestic demand and ongoing deflation in manufacturing input costs. This should keep core inflation within the 3.5-4.0% range over the next year," added Nomura.

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While inflation appears to be on a downward trajectory, economic growth is also expected to slow. Analysts at Nuvama Institutional Equities noted that India Inc. is facing weak topline growth, while households are experiencing softer incomes and moderating loan expansion, suggesting that the phase of sluggish growth will persist in the near term.

Although recent tax cuts by the government may provide some support for consumption, they may not be sufficient to revive the overall business cycle, according to the brokerage. Growth continues to face challenges due to fading pent-up urban demand, delayed impacts of tight monetary policies, household financial stress, slower nominal income growth, and reduced credit availability.

The decline in inflation follows the Reserve Bank of India's (RBI) recent monetary policy move, which marked its first rate cut since 2020. The Monetary Policy Committee (MPC) reduced the benchmark lending rate by 25 basis points to 6.25%.

Will the RBI Implement Further Rate Cuts?

Most experts agree that further rate cuts are on the horizon. However, the scale of easing is expected to be modest, likely ranging between 25 and 50 basis points.

During its last meeting, the MPC maintained a "neutral" stance to allow for policy flexibility should economic conditions shift. "Policymakers prefer to retain flexibility regarding interest rates and liquidity management, avoiding a rigid approach due to the evolving global economic landscape, which may require adaptive policy responses to maintain financial and macroeconomic stability," stated Emkay Global.

Nomura Holdings diverged from the consensus, forecasting deeper rate cuts. "While most expect around 50 basis points of additional easing, we anticipate a total of 75 basis points in cuts, bringing the terminal rate to 5.50% by the end of 2025," the firm noted.

Although debates around the extent of rate cuts continue, easing inflation is likely to create room for further reductions. Many experts predict that the RBI MPC will implement a 25-basis-point rate cut in its April meeting.