India’s retail inflation in November aligned with market expectations and remained within the Reserve Bank of India’s (RBI) tolerance band. The Consumer Price Index (CPI)-based inflation moderated to 5.48% year-on-year (YoY), primarily driven by easing food prices.
CPI inflation for December is projected to range between 5.3% and 5.4%, while economists estimate inflation for FY25 to average 4.8% – 4.9%, with a gradual glide toward the RBI’s 4% target by the second quarter of FY26.
The deceleration in inflation has fueled calls for monetary policy easing amid concerns over domestic economic growth. Analysts anticipate that the RBI could initiate a shallow rate-cut cycle in its February 2025 policy meeting, provided inflation continues to decline.
Rate-Cut Prospects
Madhavi Arora, Lead Economist at Emkay Global Financial Services Ltd., emphasized that while the headline CPI trajectory aligns with the RBI’s upwardly revised forecasts, this does not necessarily indicate a prolonged or deep rate-cut cycle.
“The policy trade-offs are getting acute with a tricky and small window of conventional rate cuts as global dynamics turn more fluid. Besides, mounting FX pressures and increasing cost of FX intervention will need to be weighed before deeply cutting rates ahead. We do not, for now, rule out a cut in February 2025, but would be more comfortable taking a firm call closer to the policy window, especially with a new Governor and MPC in place,” Arora said.
Arora also highlighted the potential for unconventional easing measures, such as gradually relaxing regulatory lending norms to revitalize credit offtake.
Hitesh Suvarna of JM Financial anticipates that the next step in RBI’s policy action will involve a rate cut, contingent on the continuation of the downward trend in inflation.
“By then, RBI would have also evaluated the impact of Trump’s tariff policies. Other than growth and inflation dynamics, defending the currency is one of RBI’s main tasks hence in a scenario where USD is expected to strengthen, RBI would want to stretch its rate easing cycle. We expect a shallow rate cut cycle (50-75 bps) both in the US and in India,” Suvarna said.
Global and Domestic Policy Context
The US Federal Reserve initiated its rate-cut cycle earlier this year, delivering cumulative reductions of 75 basis points and is widely expected to lower rates by an additional 25 basis points next week, bringing the federal funds rate to 4.25% – 4.50%.
Domestically, while the RBI has maintained policy rates to address high inflation, it shifted its monetary stance to ‘neutral’ during the October policy meeting and reduced the Cash Reserve Ratio (CRR) by 50 basis points in December. This move is seen as paving the way for a potential repo rate cut in February 2025.
The upcoming changes in the RBI’s MPC composition — marked by the induction of three new external members in October and Sanjay Malhotra’s appointment as the new Governor — along with a possible new Deputy Governor, are also expected to influence policy decisions.
Fiscal and Inflation Outlook
Radhika Rao, Executive Director and Senior Economist at DBS Bank, noted that by February, the RBI will have access to November and December inflation data as well as the FY26 Budget.
She anticipates headline inflation to normalize as the effects of weather-related disruptions on food prices subside, with inflation stabilizing in the 4%–5% range. Additionally, she expects the FY26 Budget to underscore fiscal consolidation, aligning with the government’s deficit target of -4.5%.
“We maintain our call for a 25 bps cut at the February meeting, with cumulative 75 bps cuts in this cycle, keeping an eye on the US dollar and dollar liquidity,” Rao said.
Outlook
While easing inflation strengthens the case for monetary policy adjustments, the trajectory of rate cuts will hinge on both domestic and global factors, including currency stability and fiscal priorities. A cautious approach is expected, with February emerging as a pivotal juncture for policy decisions.
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