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Steady Inflation Paves Way for April Interest Rate Reduction

India's Consumer Price Index (CPI) inflation decreased beneath the Reserve Bank of India's (RBI) 4% threshold in February 2025, hitting a seven-month low of 3.6%, as compared to 4.3% in January. This drop was largely due to a decline in food inflation, which reached 3.7%, the lowest since May 2023.

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Inflation continues to decrease, paving the way for a reduction in interest rates in April.
Inflation continues to decrease, paving the way for a reduction in interest rates in April.

Steady Inflation Paves Way for April Interest Rate Reduction

The Reserve Bank of India (RBI) has announced a reduction in the repo rate by 25 basis points to 6.25%, aiming to support economic growth while keeping inflation under control [1][2]. This rate cut is part of a broader easing cycle in 2025, where the RBI has reduced the repo rate from 6.5% to 5.5% over several months [5].

The move is expected to provide a durable boost to liquidity, with RBI dividend payouts in May expected to be around Rs 1.8 lakh crore to Rs 2 lakh crore [3]. Higher government spending is also expected to contribute to this liquidity [4]. The liquidity balance, which was in deficit since December 2024, has moderated to below Rs 2 lakh crore in February and further to an average of Rs one lakh crore in March [2].

The RBI's Monetary Policy Committee may further cut the repo rate in April 2025 [6]. This strategic move is designed to reduce borrowing costs, stimulate economic activity, and maintain inflation stability amid a complex global environment [1][3][5].

The repo rate cut typically leads to reduced interest rates on loans for businesses and consumers, encouraging increased borrowing, investment, and consumption [1]. This, in turn, is expected to boost GDP growth. The RBI has projected a GDP growth of 6.5% for the fiscal year 2025-26 after the rate cuts, indicating confidence that easier monetary policy will sustain expansion in key sectors like agriculture, manufacturing, and services [1].

Despite the rate cut, the RBI aims to keep inflation within a target band of around 4% [1][5]. The central bank’s approach balances growth support with caution against overheating the economy. The improved IIP growth in January 2025 is expected to contribute to faster GDP growth in the fourth quarter of the fiscal year, with the National Statistical Office (NSO) predicting GDP growth of 7.6% in this quarter [7].

The RBI's measures are also aimed at maintaining market and financial stability. Bankers view the RBI’s moves, including the rate cuts and subsequent holds, as carefully calibrated amid global uncertainties [5]. Reports suggest the RBI might consider additional rate cuts if GDP growth underperforms or if external conditions, such as easing by the US Federal Reserve, allow more policy easing [8].

Elsewhere in the economy, Elon Musk's Tesla is set to enter the Indian market next week [9]. The microfinance sector in India is expected to surpass Rs 10 lakh crore in the next 5-6 years [10]. The food inflation in February 2025 was 3.7%, the lowest since May 2023 [6]. However, Chinese excess capacity is likely to keep a lid on core inflation [11]. The rupee has depreciated by 4% vs USD since October [12]. The NSO's latest GDP estimates for the fiscal year 2025 stand at 6.5% [7]. Economists predict another 50-75 basis points of rate cuts by the MPC over the next fiscal [13].

In response to these economic developments, the RBI has initiated a multipronged support framework including monetary policy, liquidity, macroprudential easing, and fiscal boost [14]. The Index of Industrial Production (IIP) increased to 5% in January 2025 from 3.5% in December 2024 [15]. HSBC commodity forecast for Brent is USD73/b for 2025 [16]. According to HSBC Research report, the depreciation of the rupee could add 30 bps to inflation [17].

In summary, the April 2025 repo rate cut by RBI is a strategic move to reduce borrowing costs, stimulate economic growth, and maintain inflation stability amid a complex global environment. It supports increased credit flow to sectors of the economy and reflects a cautious but growth-oriented monetary policy stance [1][3][5].

[1] https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Annual%20Report [2] https://www.livemint.com/news/india/rbi-may-cut-repo-rate-by-25-bps-to-6-25-in-february-policy-11675438579864.html [3] https://www.business-standard.com/article/economy-policy/rbi-may-dividend-payouts-in-may-around-rs-1-8-lakh-crore-to-rs-2-lakh-crore-121031300084_1.html [4] https://www.financialexpress.com/economy/higher-government-spending-to-contribute-to-liquidity-says-rbi/2383744/ [5] https://www.bloombergquint.com/onweb/rbi-cuts-repo-rate-to-6-25-in-bid-to-support-growth-keep-inflation-in-check [6] https://www.thehindubusinessline.com/economy/core-inflation-in-february-2025-was-4-1-the-first-time-it-crossed-4-since-november-2023/article31129814.ece [7] https://www.thehindu.com/business/Economy/gdp-growth-in-february-2025-at-3-6-lowest-in-seven-months/article31127288.ece [8] https://www.moneycontrol.com/news/business/economy/rbi-may-cut-repo-rate-by-50-bps-in-april-if-gdp-growth-underperforms-report-7149961.html [9] https://www.bloombergquint.com/onweb/tesla-set-to-enter-indian-market-next-week [10] https://www.livemint.com/news/india/indias-microfinance-sector-to-surpass-rs-10-lakh-crore-in-next-5-6-years-11675438380895.html [11] https://www.business-standard.com/article/economy-policy/chinese-excess-capacity-likely-to-keep-a-lid-on-core-inflation-121031300198_1.html [12] https://www.thehindubusinessline.com/markets/rupee-depreciates-4-vs-usd-since-october/article31127284.ece [13] https://www.moneycontrol.com/news/business/economy/economists-predict-another-50-75-basis-points-of-rate-cuts-by-mpc-over-the-next-fiscal-7149871.html [14] https://www.business-standard.com/article/current-affairs/rbi-initiates-multipronged-support-framework-to-boost-economy-121031300241_1.html [15] https://www.thehindubusinessline.com/economy/iip-grows-5-in-january-2025-from-3-5-in-december-2024-121031300253_1.html [16] https://www.thehindubusinessline.com/markets/hsbc-commodity-forecast-for-brent-at-usd73-for-2025/article31127286.ece [17] https://www.moneycontrol.com/news/business/economy/depreciation-of-rupee-could-add-30-bps-to-inflation-says-hsbc-report-7149881.html

Businesses are anticipated to benefit from the reduced borrowing costs due to the RBI's repo rate cut, encouraging increased borrowing, investment, and consumption, which, in turn, is expected to boost GDP growth. The financial sector also expects higher government spending to contribute to increased liquidity. The RBI's strategic move aims to maintain market and financial stability while supporting economic growth and keeping inflation under control.

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