Retail inflation breather gives hopes of another rate cut in April

Retail inflation eased to a seven-month low in February while factory output rebounded to grow by 5% in January, indicating better tidings for the economy while giving space for further rate cuts by the central bank.
 
According to official data released on Wednesday, retail inflation as measured by the consumer price index-based inflation eased to 3.61% in February 2025 from 4.26% in January. This is its lowest level since July 2024 when CPI inflation was at 3.6%.
 
The easing in retail inflation came largely due to lower food prices and the consumer food price index declined to 3.75% in February from 5.97% in January. There was a sharp fall in prices of several food items including vegetables (-1.07%0, pulses (-0.35%) and eggs (-5.01%) in February, though retail inflation in fruits (14.82%) and oils and fats (16.36%) remained high.
 
Meanwhile, factory output as measured by the index of industrial production recovered to grow by 5% in January 2025 from 3.2% in December 2024. Significantly, manufacturing growth picked up pace and expanded by 5.5% in January from 3.4% in the previous months.
 
Amongst use-based segments, consumer durables grew by 8.3%, indicating some pick up in consumption.
 
The data on IIP and CPI are key data sets for the RBI’s Monetary Policy Committee, which meets for its bi-monthly policy review between April 7 and April 9.
 
In its last policy meet, the MPC chaired by RBI Governor Sanjay Malhotra had cut the repo rate by 25 basis points in order to support slowing economic growth as inflation had become less of a concern.
 
Analysts believe that retail inflation is likely to remain low at less than 4% in March as well and gives space to the monetary policy committee of the Reserve Bank of India to cut rates further.
 
“With inflation coming down to less than 4% and likely to remain low in March too, there is a good chance of a further repo rate cut in April given that RBI has been doing everything to provide easy flow of liquidity.  Another 25 basis points cut can be expected in April policy,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
 
ICRA expects CPI inflation at 3.9% to 4% in March and IIP expansion to moderate to about 3% to 4% in February 2025.
 
“The Feb 2025 CPI inflation print falling well below 4% has cemented the expectation of a back-to-back 25 basis points rate cut in the April 2025 MPC meeting. This may be followed by another 25-bps repo rate cut either in the June 2025 or the August 2025 meetings, dependant in large part on the next GDP growth print for Q4 FY2025,” said Aditi Nayar, Chief Economist and Head - Research & Outreach at ICRA.
 
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, "The inflation trajectory is turning more benign than earlier expectations thereby creating further room for sharper monetary easing. We expect 25bp rate cut each in April and June policy along with a shift in the stance to accommodative. Beyond June, we continue to monitor the downside risks to growth to decipher room for additional rate easing."