April CPI inflation hits an 11-month low; can RBI cut rates in the near future? Experts weigh in

Retail inflation in India has been sustainably easing for the last five consecutive months. India's Consumer Price Index (CPI)-based inflation, also known as retail inflation, eased to an 11-month low level of 4.83 per cent in April from 4.85 per cent in March, aided by falling crude oil prices.

The April inflation rate closely matched predictions, with a Mint survey of 22 economists forecasting India's retail inflation to be 4.87 per cent, slightly up from the previous month's 4.85 per cent.

Also Read: Retail inflation eases slightly in April, food inflation rises

While the CPI inflation remains above the Reserve Bank of India’s target of 4 per cent, it has been within the central bank's tolerance range of 2-6 per cent for the eighth consecutive month. In July and August last year, retail inflation prints had come to 7.44 per cent and 6.83 per cent, respectively.

India's retail inflation has been easing since December 2023, when it rose 5.69 per cent. For January and February, inflation prints came at 5.10 per cent and 5.09 per cent, respectively.

Can RBI cut in the near future?

India's retail inflation is easing, but food inflation remains a concern. Food inflation rose 8.70 per cent in April, against an increase of 8.52 per cent in March and 8.66 per cent in February due to a rise in the prices of cereals, meat and fish, and fruit.

In its last policy meeting in April, RBI expressed confidence that CPI inflation had peaked at 7.8 per cent in April 2022. However, it reiterated that the fight against inflation will continue as long as retail inflation remains above the 4 per cent target. Moreover, RBI Governor Shaktikanta Das highlighted food price uncertainties continue to weigh on the inflation trajectory.

Also Read: 3 key reasons why RBI will not cut rates this year: Elara Capital

Experts do not expect the RBI to cut rates in the near future as India's economic growth outlook remains bright, and the US Fed is not expected to cut rates until the third quarter of this year.

"We feel that, with largely good growth, the RBI will not look at rate cuts soon. In that context, a key monitorable would be GVA growth figures at end-May’24. Finally, with current figures in line with the RBI’s expectations, we do not see any shift in the tone in the coming MPC. A key risk to our outlook would be an earlier-than-expected Fed cut as we track building cracks in the US exceptionalism narrative," said Sujan Hajra, Chief Economist at Anand Rathi Share and Stock Brokers.

Madhavi Arora, Lead Economist at Emkay Global Financial Services, believes that the RBI will not precede the Fed in any policy reversal in CY24.

"We think factors such as (1) US inflation trends taking time to discern, (2) economic resilience, and (3) easier financial conditions feeding back into demand may be fading any early move towards key DM central banks/Fed easing this year. This should restrain the RBI from cutting early in 2024," said Arora.

"The RBI will not precede the Fed in any policy reversal in CY24, and policy management will have to stay vigilant amid the fluidity of global narratives. A case of ‘no cut’ by the Fed in 2024 is going to spill over into the RBI’s reaction function in CY24."

Deepak Jasani, the head of retail research at HDFC Securities, said despite CPI numbers for April coming in at an 11-month low, the RBI is not likely to cut rates or change its stance in its June meeting as the food inflation remains sticky in times of erratic weather and heat waves. 

“The RBI may wait till it has a better view of the monsoon and global monetary policy trends,” said Jasani.

In fact, repo rates can remain elevated for a longer period as the RBI expects CPI inflation to be 4.5 per cent in FY25. Since India's strong economic growth is strong, the central bank is expected to firmly pursue its inflation target.

Also Read: RBI rate cuts now ‘off the table’ in FY25, says Morgan Stanley

Premature rate cuts can deal a blow to RBI's efforts to keep inflation down at a time when commodity prices are volatile, and concerns over geopolitical tensions persist.

"At least in the June policy meeting, RBI will maintain the policy rate and stance. RBI has been very categorical in that they want inflation to start moving towards 4 per cent sustainably," said Dharmakirti Joshi, Chief Economist at CRISIL.

"Commodity inflation is low right now, but there are risks that commodity inflation may rise. RBI will consider these factors and play cautiously. Core inflation is low right now, but due to the lower base effect, and if commodity prices rise, core inflation will move up," Joshi observed.

However, economists at YES Bank expect the RBI to start cutting rates in October 2024, assuming Fed cuts in September. However, they expect the rate cut cycle to be shallow, restricted to only 50-bps in FY25.

"For FY25, we expect inflation to average nearly 4.2-4.3 per cent, assuming no sharp increase in summer vegetable prices. We expect the RBI to start the rate-cutting cycle in October 2024, assuming Fed cuts in September," YES Bank economists said.

"It could be risky for the RBI to move ahead of the Fed, as the interest differential between India and the US are at decadal low levels. The US dollar appreciation has led to depreciation pressures for EME (emerging market economy) currencies, including the Indian rupee. Given uncertainties over price movements, it is likely for the RBI to change the stance and cut rates in the same policy," they said.

Ravi Singh, SVP of retail research at Religare Broking, believes RBI may start cutting rates in the second half of the current calendar year.

"Given the easing of inflation and the slowing growth in industrial production, there is a possibility for the RBI to consider cutting interest rates in the near future. The recent data indicating a decline in inflation and a slowdown in industrial production growth may prompt the RBI to reassess its monetary policy stance," Singh said.

"The fiscal tightening reflected in the Budget 2024-25, without adding to inflationary pressures, provides room for the RBI to ease liquidity and consider repo rate cuts in the coming months with a likelihood of a rate cut of around 25 to 50 basis points, starting in the second half of the calendar year 2024. The combination of favourable economic indicators and fiscal prudence could pave the way for the RBI to contemplate interest rate reductions to bolster economic growth and maintain price stability," said Singh.

Manoranjan Sharma, Chief Economist at Infomerics Ratings, believes a 65-75 basis points policy rate cut may occur in a gradual and calibrated manner in FY25 because of the downward trending inflation trajectory and the trade-off between growth and inflation.

Sharma said RBI rate cuts will likely kick in from October 2024.

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