Moneycontrol Pro Panorama | As inflation cools, will the RBI cut rates faster?

Slowing growth and easing inflation are the perfect ingredients for the RBI to cut rates.

Amid all the negative news of global tariff wars, plummeting equity indices and a plunging rupee, India’s retail inflation numbers for January brought some respite.

At 4.3 percent, the headline Consumer Price Index (CPI) not only moderated to 4.3 percent from 5.4 percent in December but also hit the lowest in five months. The good news is that the lower inflation is led by cooling food inflation that has started converging towards core inflation. Lower prices of vegetables and pulses will make the consumer breathe easy and the policy makers optimistic of inflation moving along the glidepath to the targeted 4 percent.

Will this sustain? A report by Nomura Research points out that February prices of food items are trending lower. Ditto for core inflation, except for the skyrocketing gold prices. Beyond February, the robust winter crop output and, the government’s sensitivity to price flare-ups will drive food prices lower. Therefore, economists are more hopeful of CPI inflation in 4QFY2025 meeting its forecast of 4.1 percent.

The moot question is: will lower inflation push RBI to cut rates faster? Indeed, inflation is being reined in finally. Another factor that could fuel rate cuts is India’s slowing economic growth on the back of weaker consumer demand. This is certainly a grave cause for concern as it may see prospective investors- both foreign portfolio investors and foreign direct investors- in India’s growth story back out.

The reality is that amid the hype of India being the fastest growing economy, there are headwinds by way of a tight monetary policy, a bump-up in household borrowings that could lead to balance sheet stress and slowdown in income growth, which together cast a cloud on consumption.

Therefore, slowing growth and easing inflation are the perfect ingredients for the RBI to cut rates. Some economists are hopeful of a 75 bps rate cut through 2025 compared to the earlier estimate of a 50 bps rate cut. However, in today’s context of geopolitical developments, economic policy shifts and trade wars, there is more than meets the eye.

Note that the US dollar is growing from strength to strength with every passing day. Selling by foreign institutional investors in Indian equity markets is putting pressure on the Indian Rupee that has plummeted from 82 to a US dollar a few months back to around 87. According to UBS EM Macro strategist, Rohit Arora, if the INR depreciates by five percent against USD, inflation could be higher by around 25-30 bps, while GDP growth could get a boost of 25 bps through the short-term stimulation of exports. This could sour the rate cut party in India as the risk from “imported inflation” will increase.

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