Synopsis
A report by HSBC indicates that the RBI may reduce rates next month as March inflation trends below the 4% target, following February's decline to 3.6%. This is expected to support growth amid various economic factors.Key Takeaways
- Retail inflation fell to 3.6 percent in February.
- Another 25 basis points rate cut anticipated in April.
- Food deflation continuous with price drops in key categories.
- Core inflation remains below 4 percent threshold.
- Rupee depreciation could add 30 basis points to inflation.
New Delhi, March 14 (NationPress) Following a drop in retail inflation to 3.6 percent in February, March's inflation figures are also showing a trend below the RBI's target of 4 percent, which may prompt another rate reduction by the central bank in the coming month, as indicated by a report from HSBC Research.
HSBC Research anticipates that the RBI will continue its current cycle of rate cuts, suggesting a possible reduction of 25 basis points during the monetary policy committee meeting in April, bringing the repo rate down to 6 percent.
The report notes that inflation for the March quarter is trending lower than the RBI's expectations for this period. While the winter crop sowing has been satisfactory, the temperature in the coming weeks is crucial as the wheat crop is nearing its grain-filling phase.
Food deflation persisted for the second month in a row in February, dropping by 1.0 percent month-on-month, influenced by declines in prices of vegetables, pulses, and egg, fish & meat. Conversely, increases were noted in cereal, sugar, and fruit prices, as highlighted in the report.
Core inflation, excluding food and fuel, saw an increase across all measures due to a significant rise in gold prices in February. However, even without gold, core inflation remained well below the 4 percent threshold on an annual basis and at its long-term average on a sequential basis, according to the report.
The report also points out that the rupee has depreciated by 4 percent against the USD since October, which could contribute an additional 30 basis points to inflation based on foreign exchange sensitivities. However, a favorable outlook on oil prices (with HSBC's commodity forecast for Brent at USD73/b for 2025) and excess capacity in China are likely to keep core inflation in check.
In summary, the report concludes that headline inflation is expected to average 4 percent in FY26.
Last month, RBI Governor Sanjay Malhotra announced a 25 basis points cut in the policy rate from 6.5 percent to 6.25 percent during the monetary policy review to stimulate growth amid global uncertainties.
He mentioned that inflation has decreased and is anticipated to further moderate, gradually aligning with the RBI’s target of 4 percent.
HSBC projects India’s GDP growth at 6.5 percent, predicting an increase in rural demand post-harvest, a growth boost from an income tax rate cut for the middle class, and monetary policy easing expected to bolster growth in the April-June quarter. Nonetheless, the report notes that weakened goods exports, following the global restocking cycle and in light of US President Donald Trump’s tariff threats, could pose challenges.
