Rate Cut Countdown: India Eyes 25 bps Slash in April, But FY26 Easing May Hit a Wall!

India Ratings and Research (Ind-Ra) anticipates that the Reserve Bank of India's (RBI) monetary policy committee (MPC) will opt for a 25 basis points (bp) cut in policy rates in its upcoming April 2025 meeting. With headline inflation expected to ease to 4.7% in FY25, Ind-Ra predicts a measured approach to monetary easing, limiting the total rate cuts in FY26 to 75 bps.

“Higher and stubborn inflation had previously prompted the RBI to tighten monetary policy, raising the repo rate by 250bp between May 2022 and February 2023 to 6.5%. A 25bp cut in February 2025 brought the rate down to 6.25%,” said Dr. Devendra Kumar Pant, Chief Economist and Head of Public Finance at Ind-Ra. “The monetary policy actions in FY26 will depend on inflation trends, liquidity conditions, and global commodity price movements."

Inflation Expected to Drop Below 4% in 4QFY25

Since the introduction of Flexible Inflation Targeting, quarterly headline inflation has exceeded the upper tolerance limit of 6% in 10 quarters, remained in the 4%-6% range for 15 quarters, and dropped below 4% in 10 quarters. Ind-Ra projects headline retail inflation will fall below 4% in 4QFY25, marking the first such decline in 21 quarters. Given food's significant share in the consumption basket (39.05%), headline inflation strongly correlates with food inflation, with a coefficient of 0.83 between 2QFY17 and 3QFY25.

Inflation Intensity Weakening

Ind-Ra forecasts a continued decline in inflation intensity in FY26. As of February 2025, commodities with inflation below 4% accounted for 64.4% of the Consumer Price Index (CPI) basket—the highest level since January 2015. In contrast, the share of commodities with inflation between 4%-6% slightly dropped to 20.1%, while high-inflation commodities (above 6%) saw a sharp decline to 15.5%, down from 54.1% in August 2022.

Ind-Ra expects quarterly inflation from 4QFY25 to 3QFY26 to be below the RBI’s forecast, except for a slight overshoot in 4QFY26. The agency projects inflation below 4% in 4QFY25, 2QFY26, and 3QFY26, with an annual inflation rate of 4.0% in FY26. This assumes normal monsoon rainfall, stable global commodity prices, orderly currency depreciation, limited capital outflows, and manageable price fluctuations in perishable goods and import-dependent commodities such as pulses, edible oil, and crude oil.

In December 2024, Ind-Ra had noted a high probability that 3QFY25 CPI inflation would be lower than the RBI’s 5.7% estimate. While Ind-Ra had earlier anticipated an overshoot in 4QFY25 inflation, stronger-than-expected food deflation has led both the RBI and Ind-Ra to revise their estimates downward.

Rate Cuts in FY26

Ind-Ra expects the RBI to implement three rate cuts in FY26, totaling 75bp, following the February 2025 cut. This would result in a cumulative 100bp reduction in the current easing cycle, bringing the terminal repo rate to 5.5%. With inflation projected to average around 4.0%, the real repo rate would settle at 1.5% in FY26. However, if reciprocal tariffs impact inflation more than expected, the RBI may opt for deeper rate cuts. The minutes of the February 2025 MPC meeting indicate the central bank's awareness of slowing economic momentum, suggesting a potential shift towards using monetary policy to support growth while maintaining inflation stability.

Meanwhile, fiscal policy remains aligned with the government’s commitment to deficit reduction. The FY25 budget adhered to the government’s fiscal consolidation roadmap, and FY26 is expected to follow suit, as signaled by the Union Budget.