Rate cuts ahead? What easing of retail inflation in April means | 5 key points

Retail inflation or the consumer price index (CPI) inflation in India eased for the fifth consecutive month in a row, as it dropped to 4.83% in April, as per the latest data released by the Ministry of Statistics.

This marked the lowest rate of retail inflation in the past 11 months. In March 2024, the rate stood at 4.85%, and it was above the 5% mark in the preceding three months.

The moderation in retail inflation – still above the Reserve Bank of India’s (RBI) medium-term target of 4% – raises the question of whether rate cuts could be on the cards.

Rate cuts ahead? What inflation data suggests – 5 key points

• Although inflation has come down as compared to the soaring rate of 7.4% in July last year, the RBI still needs more time to initiate the rate cuts cycle, say economists. The repo rate – the rate at which the central bank lends to commercial banks – was raised continuously between May 2022 and February 2023, but has remained unchanged since then at 6.5%.

• The likely reason behind the RBI pushing the much-awaited rate cuts cycle is due to the high food inflation, economists explained. In the consumer price index data for April released on May 13, it was noted that inflation in the food basket soared to 8.7%, higher as compared to 8.52% in March.

• There is a considerable risk of food inflation continuing, due to the impact of heat waves, analysts said, adding that this would discourage policymakers from changing the monetary policy’s status quo. “In this backdrop, the rates are unlikely to be changed by the RBI in its next policy review meeting in June,” an economist affiliated to a private lender said.

• The path towards rate cuts also appears to be long as the RBI has reiterated that its goal is to reach the 4% inflation target on a durable basis. The Monetary Policy Committee of the central bank “will remain resolute in its commitment to aligning inflation to the target”, and “believes that durable price stability would set strong foundations for a period of high growth”, an official release issued on April 5 noted.

• Among factors that dissuade the RBI from slashing interest rates is that the US Federal Reserve – the American monetary policy authority – is yet to initiate the rate cut cycle. While the Fed had earlier projected three rate cuts in calendar year 2024, it sounded non-committal in its recent review meeting in view of the domestic inflation increasing to 3.5% in March – higher than its target of 2%. The inflation data for April will be released by the US this week.