While the Reserve Bank of India (RBI), on February 7, held its confidence that food inflation is likely to subside, aiding in moderation in headline inflation, the CPI inflation data to be released today (February 12) will give a clarity on whether the inflation trajectory is moving in tandem with the expectations. Per RBI, the inflation will subside owing to healthy Kharif production and favorable seasonality leading to lower vegetable prices, and a healthy sowing outlook for the Rabi crop. The December data at 5.22 per cent was slightly lower than 5.48 per cent in November. In October, CPI inflation had reached a 14-month high of 6.21 per cent.
As for January, per a Reuters poll, consumer inflation likely declined sharply to a five-month low of 4.60 per cent with a slowdown in food price increases.
RBI’s decision: Balance tilts toward supporting growth
On February 7, the RBI had retained FY25 CPI at 4.8 per cent YoY, projected FY26 CPI at 4.2 per cent, with Q1 at 4.5 per cent, Q2 at 4.0 per cent, Q3 at 3.8 per cent, and Q4 at 4.2 per cent. Garima Kapoor, Economist and Executive Vice President, Elara Securities, said, “In FY26, based on the trajectory the RBI has provided for inflation, we conclude that in all likelihood, in the absence of huge shocks, inflation will likely be on a receding trend. We expect FY26E CPI inflation to average around 4.5 per cent, barring any unforeseen supply shocks, a tad higher than RBI’s own estimate of 4.2 per cent. With growth likely to undershoot RBI’s FY26E estimate of 6.7 per cent (Elara estimate of 6.4 per cent), we anticipate another 50bp rate cut. We however do not rule out another 25bp rate cut towards end-FY26E (overall 100bp) if growth risks rise incrementally and inflation risks remain tepid.”
The central bank had announced a rate cut based on its view that inflationary pressures are on a decline as the concerns on food inflation are easing. This opened policy space for the MPC to undertake growth-supportive measures (rate cuts and liquidity operations). The RBI is taking comfort from reducing inflationary risks, notwithstanding Rupee depreciation.
Growth optimism and ebbing inflation risks
RBI remained positive on growth drivers, led by uptick in private consumption demand in the backdrop of tax cuts announced in the Union Budget, healthy agricultural activity bolstering rural demand, and external demand buoyed by services exports, stated a report by Elara Securities.
The central bank recognized the liquidity strain in the system on the back of advance tax payments, capital outflow, and forex operations. Garima Kapoor said, “While the market was disappointed with regards to lack of any new measures for liquidity infusion, the post policy statements of the Governor offered succor, as it acknowledged the need to be responsive to the needs of the banking system and indicated readiness to act when required. The deferred implementation of LCR guidelines is a net positive for the banking sector which is already constrained by higher cost of funds.” The brokerage firm expected the central bank to continue to be proactive in providing liquidity through open market purchases and term Variable Rate Repo auctions (VRRs).
Another rate cut in FY26?
Elara Securities projected another 50bp cut in FY26 with a total of 75bp rate cut in this easing cycle. “We expect FY26E GDP growth of 6.4 per cent vs RBI’s 6.7 per cent. As food inflation pressures ease durably, headline inflation is likely to be closer to 4.5 per cent in our view, giving the MPC space to address growth concerns. We also price in moderation in momentum of macro prudential policy tightening in FY26, a move that may be growth supportive,” Garima Kapoor stated.
However, the key risk to FY26 projections, per Elara Securities, emerges from global backdrop especially on the trade front. “Rising tariff incidences, continued geopolitical risks, and their spillover on global monetary policies, divergent Bank of Japan monetary policy vs Developed Markets (DM) peers are the key factors that warrant attention. If the global central banks (mostly Western DM central banks) fail to deliver the projected rate cuts in CY25 due to inflationary impulses, spillover on Emerging Markets (EM) financial conditions is likely to tie the hands of EM central banks including the RBI,” it said.
The RBI MPC had, on Feb 7, cut the repo rate by 25bp to 6.25 per cent while retaining the neutral policy stance, reflecting likely concerns over the Rupee’s depreciation.