With India’s retail inflation, based on the Consumer Price Index (CPI), for February dipping to a seven-month low 3.61 per cent, UBS India said that the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is expected to cut repo rate further by 50 bps in CY2025. The next MPC meeting is scheduled for April 7- 9. “We maintain our view that there is scope for further 50bp cut in repo rate in this cycle with the next one pencilled in for April policy. Besides ensuring currency flexibility, we expect the RBI to continue to take measures to improve banking system liquidity especially in the context of the seasonal rise in liquidity deficit expected towards the financial year end (March),” said Tanvee Gupta Jain, Economist, UBS India.
With cyclical recovery already underway, UBS India said that monetary policy support in terms of rate cuts, liquidity support and regulatory easing will help strengthen India’s domestic growth amid rising global uncertainty, especially US trade policies and the risk of reciprocal tariffs on India.
FY26 inflation forecast
Headline CPI inflation, UBS India said, is expected to average 4.2 per cent in FY26 vs 4.7 per cent in FY25E. The retail price data available for the month of March (till date) suggest that vegetable prices have continued to soften and some decline is also observed in case of pulses and cereal prices. “That said, we are closely monitoring the average temperature during the month of March (after a warm February) as higher temperatures could adversely impact yields of winter crops including wheat and rapeseed during their maturing phase. In our base case, we expect headline CPI inflation to average 4.2 per cent in FY26 (vs 4.7 per cent in FY25E),” said Tanvee Gupta Jain.
In February, CPI inflation eased further to 3.6 per cent YoY, lowest since July 2024 largely led by significant moderation in food prices (mostly vegetables). Core inflation, on the other hand, inched up to 4 per cent YoY in February (vs 3.7 per cent YoY in the previous month). This was led by higher gold prices and marginal pick-up in core services inflation. Taking into account the lower than expected inflation, UBS India forecasted March quarter CPI inflation to undershoot RBI’s estimate of 4.4 per cent YoY by 50bps.
Food inflation eased in February
In February, food inflation decelerated sharply to 3.7 per cent YoY (vs 6 per cent YoY in the previous month). On a sequential basis, food prices were down 2 per cent MoM in February. This was largely led by correction in vegetable prices (-11 per cent MoM) (including tomatoes, onions, potatoes), pulses (-3.6 per cent MoM), meat & fish, eggs amongst others. However, fruits, sugar, cereals and edible oil prices inched up sequentially during this month. Inflation in the fuel and light segment continued to remain negative at -1.3 per cent YoY in February.
Core inflation inched up
In February, core inflation inched up to 4 per cent YoY in February. Inflation in the transport and communication segment rose slightly to 2.9 per cent YoY in February (vs 2.8 per cent YoY in the previous month). Excluding the two major energy components (petrol and diesel), refined core inflation also inched up to 4.3 per cent YoY (vs 3.9 per cent YoY in the previous month).