CPI inflation moderated to a five-month low in January, coming in at 4.31 percent, marking a decline for the third consecutive month. According to economists and experts, the softening is likely to continue going ahead as food prices ease.

According to data, headline inflation is likely to cool further in February, amid lower vegetable and pulses prices. "We expect core inflation pressures to remain largely capped in February across most categories, except for the rise in gold prices and some pass through from a weaker currency," said Japan-based brokerage Nomura Holdings.

Beyond February, the combination of robust crop output and the government’s sensitivity to price flare-ups is likely to lead to lower food inflation this year. "On core inflation, we see downside pressures from weak domestic demand and continued deflation in manufacturing input costs, which should keep core inflation in the 3.5-4.0 percent range over the next one year," added Nomura.

While inflation is likely to be softer going ahead, so is growth. The slower growth phase is likely to continue in the near term, noted analysts at Nuvama Institutional Equities, as India Inc is seeing weak topline growth and households are seeing softer incomes and moderating loan growth.

While the government tax cut could help support pockets of consumption, it might not be sufficient to revive the business cycle, stated the brokerage. Growth is still seeing headwinds from a fading of pent-up urban demand, the lagged effects of tight monetary policy, household balance sheet stress, slowing nominal income growth and a negative credit impulse.

The fall in inflation comes just a few days after the Reserve Bank of India's Monetary Policy Committee embarked on its first rate cut since 2020, taking the benchmark lending rate to 6.25 percent after a quarter-sized cut.

HOWEVER, WILL THE RBI CONTINUE TO CUT RATES AHEAD?

The consensus is a resounding yes, however, the quantum of easing for this cycle is likely to be shallow - between 25 basis points and 50 basis points.

However, in the previous meeting, the MPC maintained its 'neutral' stance, in an attempt to indicate policy flexibility, should the picture on the cards change. "Policymakers prefer maintaining flexibility on rates and liquidity management, and not to be tied uni-directionally, given the fluid global dynamics that may also require them to be more nimble on policy responses for ensuring financial and macro-economic stability," said Emkay Global.

An outlier, Nomura Holdings said, "Against the consensus view of ~50 bps of additional easing, we continue to expect 75 bps of further cuts to a terminal rate of 5.50 percent by end-2025."
However, while the rate cut cycle is still debated, the softening inflation is likely to pave the way for further cuts, with most experts building in a 25 basis points cut in the RBI MPC's April meeting.

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