Ind-Ra predicts 25 bps rate cut in April as inflation hits seven-month low
Ind-Ra expects the RBI to cut policy rates by 25 basis points in April 2025 following a decline in retail inflation to a seven-month low of 3.61% in February.
The decline in inflation of vegetables and protein-based products (meat and fish, egg, milk & products and pulses & products) was mainly responsible for the decline in food inflation. (Image: Freepik)
India Ratings and Research (Ind-Ra) expects the Reserve Bank of India (RBI) to cut policy rates by 25 basis points in April 2025, following a decline in retail inflation to a seven-month low of 3.61% in February 2025. This drop was driven by a sharp fall in consumer food inflation, which hit a 21-month low of 3.75%.
The decline in inflation of vegetables and protein-based products (meat and fish, egg, milk & products and pulses & products) was mainly responsible for the decline in food inflation. The decline in food inflation was sharper than the decline in headline inflation, leading to core inflation in February 2025 increasing to 3.95%, a 15-month high.
Sustained decline in cereals inflation and government’s assessment of a wheat harvest of 115.43 million tonnes in 2024-25 is likely to have an impact on wheat prices. While the rice inflation has been falling from March 2024, the wheat inflation has been on increasing trend in January and February 2025. The decline in vegetables inflation is expected to continue in March 2025 as well.
Inflation in March 2025 may increase marginally to 3.8%, mainly due to the base effect. “We expect inflation to undershoot the RBI’s FY25 and 4QFY25 retail inflation forecast of 4.8% and 4.4%, respectively. Reciprocal tariff by the US has potential to make a dent in the Indian economic growth in FY26. February 2025 retail inflation would be a key factor for monetary policy committee meeting of April 2025. We expect the RBI to cut policy rates by 25 bps in April 2025 and maintain sufficient liquidity in the system,” said Ind-Ra.
Factory Output Growth Improves to an Eight-Month High; Some indication of Broad-Based Recovery
The factory output growth improved to an eight-month high of 5.0% in January 2025 (December 2024: 3.5%, January 2024: 4.2%). The manufacturing sector was the IIP growth driver by contributing nearly 84% to the January 2025 IIP growth. The January 2025 IIP growth was without much support from the electricity sector.
At the use-based level, the two lead indicating sectors in IIP – basic goods and intermediate goods – grew more than 5% after a gap of five months. This along with capital goods, infrastructure goods and intermediate goods growing at more than 7% in January 2025 are pointers towards nascent stage of broad-based recovery. However, this should not be treated as full industrial recovery as we have witnessed in the past most of the times, these recoveries fizzle out quickly. The consumer non-durable is still in degrowth stage, the yoy decline in January 2025 was 0.2% (December 2024: decline of 7.5%). The retail inflation data for February 2025 provide support to the expectation of nascent industrial recovery to get some feet.
Another way of looking at whether the industrial growth is broadening is analysing IIP data at 2-digit level. The number of sectors having positive growth in January 2025 increased to 19 from 17 in December 2024. The combined weights of these 19 sectors in manufacturing is 70.60% (weight of manufacturing sector in IIP is 77.63%). Although, this is lower than September 2024 when 19 sectors with aggregate weight of 74.69% witnessed a positive growth, however, the IIP growth in September 2024 was 3.2%.
Going forward, Ind-Ra expects the industrial output to grow in February 2025 around 5%, similar to January 2025 due to a relatively high base effect (February 2024: 5.4%, January 2024: 4.2% yoy). The decline in retail inflation will have some positive impact on industrial demand in February 2025 and beyond.
