RBI likely to cut rates by 25 bps in April 2025: Ind-Ra

India Ratings and Research (Ind-Ra) expects the RBI monetary policy committee (MPC) to go in for a 25 bp cut in policy rates in its forthcoming April 2025 meeting, and a maximum of three rate cuts in FY26, aggregating to 75 bp.

“We expect the headline inflation in FY25 to cool off to 4.7%. Higher and stubborn inflation had prompted the RBI to tighten the monetary policy, and it raised the policy rates by 250 bp between May 2022 and February 2023, reaching 6.5%. The repo rate in February 2025 was cut by 25 bp to 6.25%. The monetary policy actions in FY26 will be dependent on inflation movements, liquidity situation and trajectory of global commodity prices. Monetary easing may be limited to 75 bp in FY26,” says Dr. Devendra Kumar Pant, Chief Economist and Head Public Finance, Ind-Ra.

Headline Inflation Likely to Decline to Below 4% in 4QFY25: Since the beginning of Flexible Inflation Targeting, the quarterly headline inflation remained higher than the upper tolerance limit of 6% in 10 quarters (4QFY20-3QFY21, 4QFY22-4QFY23 and 2QFY24), between 4%-6% range in another 15 quarters and below 4% for the remaining 10 quarters. Ind-Ra expects the headline retail inflation in 4QFY25 to fall below 4%, after a gap of 21 quarters. Due to the high weight of food in the consumption basket (39.05%), the headline inflation moves in tandem with food inflation (correlation coefficient between 2QFY17 and 3QFY25: 0.83).

Inflation Intensity Weakening: Ind-Ra expects the inflation intensity to decline further in FY26. Based on the monthly inflation data for 299 commodities, the sum of weights of commodities with inflation below 4% increased to 64.4% in February 2025, highest in since January 2015 (August 2022: 21.0%). The sum of weights of commodities with medium inflation (4%-6%) declined marginally to 20.1% in February 2025 (25.0%). The sum of weights of commodities with high inflation (more than 6%) declined sharply to 15.5% in February 2025 (54.1%).

Expect 75 bp Rate Cut by RBI in FY26: RBI may go in for maximum three rate cuts in FY26, aggregating to 75 bp. These along with one rate cut in February 2025 would translate in a 100 bp cut in the current policy easing with the terminal repo rate at 5.5% and average inflation at around 4.0%, which would translate in a real repo rate of 1.5% in FY26. However, “if the impact of reciprocal tariff turns out to be higher than the expectations, we may see higher easing by the RBI,” it says.

The February 2025 MPC minutes suggest that the RBI is cognizant of slowing growth momentum. This suggests that while the low and stable inflation is the prime target of the RBI, the growth support through monetary policy will increasingly be a focus area of monetary policy. The fiscal policy in FY25 has remained consistent with the government objective of reducing the fiscal deficit of the union government. FY26 is unlikely to be any different as indicated by the Union Budget.