Moneycontrol Pro Panorama | March inflation falls. More rate cuts? 

The MPC shifted to an accommodative stance and delivered a 25-basis-point repo rate cut in April, bringing the rate to 6 percent.

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India’s retail inflation has just clocked in at a remarkable 3.34 percent for March 2025, its lowest in 67 months, according to data released on April 15. This marks the second straight month below the Reserve Bank of India’s (RBI) 4 percent target, down from 3.61 percent in February, and caps FY25 with an average inflation rate of 4.6 percent — a notable drop from FY24’s 5.4 percent. For the RBI’s Monetary Policy Committee (MPC), this is more than a data point; it’s a green light to rethink its playbook.

The headline number owes much to a sharp slowdown in food inflation, which eased to 2.69 percent from 3.75 percent in February. Cheaper vegetables, eggs, and pulses led the charge, as noted by Radhika Rao, Senior Economist at DBS Bank.

A favourable base effect from last year’s higher prices also helped, and Bank of Baroda’s Madan Sabnavis predicts this tailwind could keep inflation tame for another 3-4 months. Crisil’s Dharmakirti Joshi adds that its Thali Index shows a 3 percent drop in the cost of a vegetarian home-cooked meal, with non-veg holding steady, reinforcing the food price relief.

But it’s not all roses. Core inflation—covering non-food, non-fuel items like transport, education, and precious metals—remains sticky at 4.1 percent, according to Rao. Personal care products are a particular pain point, surging 13.5 percent due to higher input costs, says Sabnavis. But much of that is due to higher gold and silver prices.

Edible oils (17 percent) and fruits (16.2 percent) are also keeping food inflation from falling further, driven by volatile global prices and exchange rate pressures. An 8 percent hike in LPG prices this April could nudge inflation up by 0.1 percent, a small but nagging risk.

The RBI was quick to seize the falling inflation window in the last meet. With inflation undershooting its Q4 projections, the MPC shifted to an accommodative stance and delivered a 25-basis-point repo rate cut in April, bringing the rate to 6 percent. Rao argues this move was “validated” by the data, and she expects further easing in June. Sabnavis is even bolder, forecasting another 50 basis points in cuts for FY26 if inflation stays this benign.

Crisil’s Joshi pencils in two more 25-basis-point cuts this fiscal, citing not just food price relief but also a sharp drop in crude oil prices that’s keeping non-food inflation in check.

This dovish turn reflects a broader MPC shift. For years, the RBI’s laser focus was on wrestling inflation down to 4 percent. Now, with headline inflation consistently below target and FY26 projections at 4.3 percent (Crisil’s estimate), the MPC can afford to prioritise growth. The convergence of rural and urban inflation driven by food prices as the “equalizer”, according to Sabnavis, further simplifies the RBI’s job, reducing regional disparities that complicate policy.

 The way forward 

The MPC’s forward guidance is likely to emphasise flexibility. With food inflation tamed and monsoon forecasts from the Indian Meteorological Department (above-normal) and Skymet (normal) looking promising, the RBI can lean into supporting demand without immediate inflationary blowback. Joshi’s FY26 breakdown—4.6 percent for food, 2.5 percent for fuel, and 4.2 percent for core—suggests a balanced outlook, though heatwaves could disrupt food supply chains and warrant caution.

However, the MPC won’t go all-in on cuts. External risks—like global commodity spikes or rupee volatility—mean the RBI will keep its powder dry.

States like Kerala (6.6 percent inflation) and others above 3.3 percent (e.g., Maharashtra, Tamil Nadu) signal pockets of pressure that could flare up. Meanwhile, Delhi and Telangana’s ultra-low rates (1.5 percent and 1.1 percent) show uneven relief, a reminder that national averages hide local realities.

What does it mean for borrowers?

For borrowers, lower rates are a boon. Cheaper loans could spur housing, auto, and business investment, especially with credit growth already slowing (as seen in recent banking data). But savers—particularly retirees reliant on fixed deposits—are getting squeezed. Banks, already slashing FD rates to protect margins, will likely cut further as borrowing costs drop, eroding real returns in a still-tax-heavy environment.

The MPC’s accommodative stance also signals confidence in India’s macro stability. Wholesale inflation at 2.05 percent in March aligns with the CPI trend, reinforcing the low-pressure environment. But the RBI must tread carefully. Over-easing risks stoking core inflation, especially if global fuel or edible oil prices rebound. Structural fixes—like tax relief on essentials or supply chain reforms—could complement rate cuts, ensuring inflation stays manageable without sacrificing growth.

That apart, in this piece, Shishir Asthana probes whether the US market has lost its charm. While global markets reel under the weight of US President Donald Trump's tariff shocks, Indian markets have staged a quiet comeback, Asthana rightly observes.

Separately, please read the piece by Rajrishi Singhal who discusses the outlook for the Indian banking industry ahead in his piece citing RBI outlook.

Got thoughts on the RBI’s next rate move or any of the topics discussed in this newsletter? Drop us a line or share this newsletter with your network. Until next time!

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