With the inflation in the second quarter of FY25 likely to remain below the Reserve Bank of India’s (RBI) forecast of 4.4 per cent, amid the cooling of food prices, the central bank may consider rate cuts in the forthcoming Monetary Policy Committee (MPC) meetings. The year-on-year inflation rate (3.65 per cent), based on the All India Consumer Price Index (CPI), for the month of August was the second lowest in the last five years. It has now been one year since CPI inflation stayed below the upper threshold of 6 per cent. Regulating interest rates is a key instrument for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and the general public, which can, in turn, bring down consumer spending and inflation.
Food inflation, which had been the primary driver, remained under 6 per cent for the second consecutive month, after exceeding that level for 12 straight months since July 2023. Conversely, core inflation, driven by a revival in rural consumption, has risen for the third consecutive month to 3.41 per cent. Given the current inflation trends, it is likely that inflation for the second quarter will remain below the RBI’s expectation of 4.4 per cent. India’s industrial output growth increased to 4.8 per cent in July, following an upwardly revised growth of 4.7 per cent in the previous month.
The moderation in the growth of the electricity and mining sectors was balanced by acceleration in the manufacturing sector. An improvement in kharif sowing amid a good monsoon bodes well for the private consumption demand. Going ahead, it is expected that rising kharif production boosted by an above-normal southwest monsoon will contribute to further softening CPI inflation, with further improvement in food supplies. Overall, a sustained and meaningful improvement in consumption and private capex remains critical for the performance of industrial activity. The consistent growth of IIP, supported by growth in manufacturing, capital goods and intermediate goods indicates steady momentum in India’s manufacturing sector.
In its third bi-monthly Monetary Policy for FY25 on August 8, the RBI Governor-led MPC left benchmark repo rate unchanged at 6.5 per cent for the ninth straight meeting, and maintained the policy stance of ‘withdrawal of accommodation’. The RBI may consider adopting rate easing in 2025 only. However, the quantum would depend upon how the Credit-Deposit ratio declines along with the inflation trajectory. With softening demand across key sectors, the RBI might also opt for a pre-emptive rate cut before 2025 to reinvigorate consumption and support economic momentum. While inflation control remains a priority, the need to boost domestic consumption may prompt an earlier rate cut. Thus, an earlier move in late 2024 cannot be ruled out.
