After a prolonged period of subdued inflation, India’s Reserve Bank (RBI) appears ready to shift monetary policy toward easing, driven by both inflation dynamics and growth concerns.
Inflation Outlook
- Underlying inflation is trending closer to the RBI’s 4% target.
- Recent data points to easing food prices, supported by good monsoon harvests and government supply management.
- Core inflation remains moderate, with about 68% of the consumer price basket showing inflation at or below 4%, the highest since early 2020.
- Inflation is expected to average around 4% by FY26, down from RBI’s current forecast of 4.5% for FY25.
- Risks of second-round inflation effects are low due to soft wage growth and subdued demand.
Growth and Policy Implications
- GDP growth is expected to moderate from 8.2% in FY24 to about 6.7% in FY25, with downside risks emerging thereafter.
- Financial stability concerns are being addressed via targeted macroprudential measures, allowing monetary policy to focus on inflation.
- Nomfins anticipates a more aggressive easing cycle than consensus: a cumulative 100 basis points cut by mid-2025 to a policy rate of 5.50%, versus consensus expecting only 50 basis points starting late 2024.
Conclusion
With inflationary pressures easing and growth momentum softening, the RBI is positioned to pivot toward rate cuts sooner and more decisively than widely expected, marking a significant shift in India’s monetary stance.
