After the February retail inflation rate reduced to 3.6%, March inflation is also following below the Reserve Bank of India's (RBI) target of 4%, making it more possible that the central bank will cut interest rates again next month, as stated by HSBC Research in a report.
The RBI has already started a rate-cutting cycle and will have to come out with another 25 basis points (bps) cut in its April monetary policy committee (MPC) meeting, reducing the repo rate to 6%," the report added.
It further noted that inflation for the March quarter is currently trending below the RBI’s forecast. While winter crop sowing has been strong, the coming weeks will be crucial due to rising temperatures, as the wheat crop is in its grain-filling stage.
Food prices continued to experience deflation for the second month in a row in February, falling by 1% month-on-month. This was mainly due to decreased prices of vegetables, pulses, and egg, fish & meat. Yet, cereals, sugar, and fruits recorded a rise in prices.
Core inflation, omitting food and fuel, registered a rise across the board due to a dramatic spike in gold prices throughout February. Excluding gold, though, core inflation was still well below 4% on a year-over-year basis and consistent with its long-term history on a sequential basis.
The report also noted that the rupee has fallen 4% against the US dollar since October, which would add another 30 bps to inflation, depending on foreign exchange sensitivity. But steady oil prices—HSBC forecasts Brent crude at USD 73 per barrel in 2025—and China's excess capacity are likely to contain core inflation.
Considering these factors, HSBC expects headline inflation to be around 4% on average during the financial year 2025-26.
Last month, RBI Governor Sanjay Malhotra had declared a 25 bps cut in the policy rate from 6.5% to 6.25% in an attempt to boost economic growth in the face of global uncertainties.
He also noted that inflation has been trending lower and is poised to continue easing, ultimately to converge with the central bank's 4% target.
HSBC has retained its GDP growth forecast for India at 6.5% based on factors like a surge in rural demand after the harvest season, higher consumption led by middle-class income tax reductions, and monetary policy relaxation. But softer goods exports in the wake of the global restocking cycle, combined with possible tariff threats from U.S. President Donald Trump, could be a challenge, the report warned.
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