Lower-than-expected consumer prices index (CPI) inflation, which was also below the Reserve Bank of India's (RBI) medium-term target of 4 percent, has intensified the chances of another rate cut by the central bank in April monetary policy, economists said.
Additionally, economists believe that there could be some liquidity announcements by the central bank in the upcoming monetary policy on top of the measures announced recently to boost liquidity, considering the tightness in the liquidity.
"We see space for further monetary policy easing by RBI. We expect 25 basis points (Bps) cut in April and 25 bps cut in June," said Gaura Sengupta, Economist at IDFC First Bank.
Adding to this, Madhavi Arora, lead economist & Emkay Global Financial Services said despite the shocker on core, the pleasant headline CPI surprise implies that the 4QFY25 inflation may undershoot RBI’s forecast by more than 40 bps, and could keep the rate cut possibility in April solid, which was also reflected in the recent dovish policy minutes.
The central bank in February's monetary policy had cut repo rate by 25 basis points (bps) to 6.25 percent, while the rates for the Standing Deposit Facility, Marginal Standing Facility, and bank rates remained at 6.5 percent.
The RBI has increased the repo rate by 250 basis points between May 2022 and February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation to bring it to the medium-term target of 4 percent.
India's retail inflation eased to a seven-month low of 3.61 percent in February, as food inflation eased further, according to data released by the government on March 12.
The decline in February marks only the third time this fiscal year that inflation has dipped below 4 percent.
The inflation number was below the MC poll median of 19 economists that pegged inflation at 3.8 percent.
Food inflation eased further below 6 percent for the first time since September 2024. India's food inflation had reduced below 8 percent for the first time in four months in January, as food prices had recorded 6 percent growth over the previous year.
The members of the monetary policy committee (MPC) in the February minutes also said concerns over India's economic growth and easing inflation trajectory made a room for the central bank to cut rates, showed February policy minutes.
"There has been a shift in the domestic growth inflation balance since the December 2024 policy – while the inflation registered sequential softening, growth outcomes were weaker. Heightening uncertainties, emanating from the global financial markets and trade policies too cloud the outlook for domestic growth and inflation," said RBI deputy governor M Rajeshwar Rao.
Further, RBI governor Sanjay Malhotra said that given the macroeconomic outlook when inflation is expected to align with the target, and recognising that monetary policy is forward-looking, he views a lower policy rate to be more appropriate at the current juncture.
On the liquidity front, economists said that the central bank may infuse another Rs 2 lakh crore in the next financial year, which could be essential for the transmission of the rate cut.
"We expect further liquidity infusion of inr2tn in FY26 to insure system liquidity is a mild positive. This is essential for transmission of rate cuts," Sengupta said.
Liquidity in the banking system has also been under stress in the last few months due to slower government spending, interventions in the foreign exchange market by the RBI, and heavy selling by foreign portfolio investors in Indian equities.
To support liquidity in the banking system, the RBI has since late 2024 infused around Rs 3 lakh crore worth of durable liquidity, tapping a combination of VRR or variable rate repo auctions, swaps and OMOs.
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