Banking Central | What does the latest inflation number mean for rate watchers?

Easing inflation opens more room for the MPC to cut rates

Last week, a key data release for the banking sector, and the broader economy as a whole, was the release of retail inflation data. This number has lot of say in deciding the course of interest rates in the economy.

India’s retail inflation dropped to an impressive 3.34% in March 2025, the lowest in over five years, as per data released on April 15. This marks the second consecutive month below the Reserve Bank of India’s (RBI) 4% target, down from 3.61% in February, and wraps FY25 with an average inflation rate of 4.6%—a significant decline from FY24’s 5.4%.

For the RBI’s Monetary Policy Committee (MPC), this isn’t just a statistic; it’s a signal to further recalibrate its strategy. The headline figure was driven by a notable slowdown in food inflation, which fell to 2.69% from 3.75% in February. Affordable vegetables, pulses, and eggs played a key role. A favorable base effect from last year’s elevated prices also contributed. Crisil’s Thali Index, which shows a 3% reduction in the cost of a vegetarian home-cooked meal, with non-veg meals stable, underscoring the easing food prices.

However, challenges persist.

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Core inflation—encompassing non-food, non-fuel items like transport, education, and precious metals—remains stubborn at 4.1%. Personal care products, up 13.5% due to rising input costs, are a sore spot though much of this is tied to soaring gold and silver prices.

Edible oils (17%) and fruits (16.2%) are also keeping food inflation from dropping further, fueled by global price volatility and currency pressures. An 8% LPG price hike in April may add a modest 0.1% to inflation, posing a minor risk.

The RBI capitalized on this low-inflation window at its last meeting. With inflation below its Q4 forecasts, the MPC adopted an accommodative stance and cut the repo rate by 25 basis points to 6% in April.

This dovish pivot reflects a broader MPC shift. After years of prioritizing inflation control at 4%, the RBI now has room to focus on growth, with headline inflation consistently below target and FY26 projections at 4.3% (per Crisil). The alignment of rural and urban inflation, driven by food prices simplifies policymaking by reducing regional disparities.

So what next?

The MPC’s guidance will likely emphasize adaptability. With food inflation under control and promising monsoon forecasts—above-normal from the Indian Meteorological Department and normal from Skymet—the RBI can support demand without immediate inflationary risks.

Still, the MPC will proceed cautiously. Global commodity price spikes or rupee volatility could pose risks, prompting the RBI to maintain flexibility. States like Kerala (6.6% inflation) and others above 3.3% (e.g., Maharashtra, Tamil Nadu) indicate localized pressures, while Delhi and Telangana’s low rates (1.5% and 1.1%) highlight uneven relief, underscoring the complexity of national averages.

Lower rates are a win for borrowers, potentially boosting housing, auto, and business loans, especially as credit growth slows (per recent banking data). However, savers, particularly retirees dependent on fixed deposits, face challenges.

Banks, cutting FD rates to preserve margins, are likely to reduce them further as borrowing costs fall, eroding real returns in a high-tax environment.

The MPC’s accommodative stance signals confidence in India’s economic stability. Wholesale inflation at 2.1% in March aligns with the CPI trend, reinforcing a low-pressure environment. Yet, the RBI must remain cautious. Over-easing could reignite core inflation, especially if global fuel or edible oil prices surge.

Structural reforms, such as tax relief on essentials or supply chain improvements, could complement rate cuts to sustain low inflation while fostering growth.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)