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.

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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.

Investing insights from our research team

Kotak Mahindra Bank: Time to reverse underperformance as RBI lifts embargo

Ashok Leyland Q3 FY25: Recovery in sight, valuations attractive

Jubilant FoodWorks: India business picking up, valuation expensive

MTAR Technologies: Strong earnings visibility, robust order pipeline to support valuation

PG Electroplast – A lot of upside levers

Syngene: Conversion of pilot projects to long-term contracts a big positive

Galaxy Surfactants: Weak show signals more pain for the FMCG sector

Pearl Global Industries Q3 FY25: Strong demand keeps growth on track

Cantabil Retail India: Positioning for sustainable long-term growth

What else are we reading?

Lower January inflation opens door to an April rate cut

US metal tariffs may be a negotiating tactic, but can still hurt metal producers

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Is the worst behind for Apollo Tyres?

Two years since whip on unsecured loans, which banks are toeing the regulatory line?

At Paris AI summit, it was US, UK versus the rest of the world

AMFI Data: Balancing confidence and caution

‘The Opec of nickel’: Indonesia’s control of a critical metal (republished from the FT)

Beyond Handouts: India's inclusivity push must shift from cash to careers

China’s DeepSeek and the perils of discarding the Nehruvian paradigm

Bet on consumption demand, not rate cuts, to catalyse investment

India: Will a weak rupee constrain the easing cycle?

DeepSeek is India’s final call to board the AI flight

Trump's new inflation message? Just change the topic

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Vatsala Kamat
Moneycontrol Pro