India's retail inflation cooled to a six-year low in April. Another rate cut ahead?

New Delhi: India’s retail inflation eased in April to its slowest pace in over six years on the back of lower food prices, potentially allowing the central bank to cut its key policy rate for a third successive time to spur economic growth.

Retail inflation based on the Consumer Price Index rose 3.16% year-on-year in April, down from 3.34% in March, 3.61% in February, and 4.83% in the same month last year, according to data from the ministry of statistics and programme implementation.

AMint poll of 21 economists had projected retail inflation easing to 3.2% in April, marking a third consecutive month of sub-4% print and the longest streak of continuous inflation easing in at least five years. The Reserve Bank of India aims to keep CPI inflation at 4%, with a plus-minus range of 2%.

Food inflation in April eased to 1.78% from 2.69% in March, 3.75% in February, and 4.83% in the same month last year.

RBI’s monetary policy committee unanimously cut the policy repo rate by 25 basis points to 6% at its 54th meeting last month. The panel implemented a similar rate cut in February, its first since May 2020 as the central bank earlier focused its energies on taming inflation over incentivising economic growth.

With the Indian economy registering a 6.4% growth in the December quarter—its slowest since January-March of 2022-23, barring one quarter—economists now widely expect the central bank to opt for another rate cut in June.

“Softening food and crude oil prices are likely to keep inflation below the RBI’s 4% target, creating room for a potential repo rate cut in the upcoming MPC meeting. However, steadily rising service inflation may exert some pressure on core inflation,” said Sujan Hajra, chief economist and executive director, Anand Rathi Group.

“Overall, with inflation under control, the policy focus is expected to shift more firmly towards supporting growth—an environment that, along with a likely decline in interest rates, bodes well for corporate earnings and the Indian equity market outlook,” Hajra added.

Also read | The state of India’s economy is not as bright as GDP data may suggest

Not all foods

While overall food inflation has slowed from the elevated 7% level of November 2023 to June 2024, prices of key food items such as fruits, oils and fats have remained high.

In April, prices of cereals, meat and fish, eggs, vegetables, and pulses rose at a slower pace than in the previous month, while prices of fruit, oil and fats increased. Milk prices also rose in April as compared with the previous month.

That said, overall food and beverage inflation slowed to 2.14% in April from 2.88% in March.

However, economists expect vegetable prices to rise in the second half of May due to soaring temperatures in North India and unseasonal rains in southern states, which could push up the CPI inflation print.

According to Crisil Intelligence Research’s Thali Index released last week, the cost of both vegetarian and non-vegetarian meals fell by 4% on-year largely due to lower vegetable prices.

“The record rabi harvest (winter crops harvested in spring) and robust pulses output, as indicated by the Second Advance Estimates, combined with the forecast of a favourable monsoon for the upcoming kharif (monsoon crops) season should keep food inflation in check,” said Dharmakirti Joshi, chief economist, Crisil Ltd.

“Core inflation inched up 10 basis points to 4.2% in April but remained below its trend level (measured by the decadal average). Given the current inflation trajectory, a further 25-basis point rate cut is expected in the June monetary policy review,” he added.

Overall, 14 states reported inflation below the 3%-mark in April—Andhra Pradesh, Assam, Bihar, Chhattisgarh, Delhi, Gujarat, Himachal Pradesh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan, Telangana, Uttar Pradesh, and West Bengal.

Also read | Statistical dust-up: The great Indian GDP controversy needn’t have arisen

An additional 75 bps rate cut

Aditi Nayar, chief economist and head–research and outreach at ICRA Ltd, expects retail inflation in May to bounce higher to 3.5%, although that would still allow room for RBI to lower its policy rate.

RBI has forecast inflation at 4% in 2025-26, with quarterly estimates at 3.6% for the first quarter (April-June), followed by 3.9% for Q2, 3.8% for Q3, and 4.4% for Q4.

“The benign April inflation reading, expectations of another sub-4% print in May, a recent dip in crude oil prices, and the IMD’s (India Meteorological Department) forecast of an above-normal monsoon with an early onset in Kerala give RBI’s MPC room to maintain its growth-focused stance when it meets in June 2025,” Nayar said.

“We anticipate the CPI inflation to average 3.5% in FY2026, with the prints for Q2 and Q3 sharply trailing the MPC’s projections for these quarters, allowing for an additional 75 bps of rate cuts in this calendar year. A 25 bps rate cut appears forthcoming in the June 2025 policy, followed by easing of 25 bps each in the August and October 2025 policy reviews,” she added.

Policy makers are focused on reviving the pace of India’s economic growth, which has been buffeted by both global and domestic headwinds, including weak consumption and corporate earnings. US President Donald Trump’s reciprocal tariffs and the India-Pakistan conflict have only added to the worries.

RBI’s monetary policy committee recently trimmed its forecast on India’s gross domestic product (GDP) growth for 2025-26 to 6.5% from 6.7%.

After the monetary policy decision in April, RBI governor Sanjay Malhotra said India’s GDP growth forecast was marked down by 20bps due to global trade and policy uncertainties, especially Trump’s unexpectedly steep tariffs on Asia’s third-largest economy.

“We expect RBI to opt for a 25bp cut in policy rates (in June) given the fragile global economic and geopolitical environment,” said Paras Jasrai, associate director at India Ratings and Research. “The real repo rate by end-March 2026 is expected to be around 125bp... Thus, we expect that the central bank may cut policy rates by at least 75bp in the rest of FY26.”

Also read | Will India’s 2025-26 tax cut spur consumption and GDP growth?