RBI Rate Cut Outlook After CPI Inflation Falls to 3.61%
Why in the news
Cooling retail inflation has strengthened expectations that the RBI will cut rates again, with April seen as the likely start.
Key facts
| Indicator | Value |
|---|---|
| CPI inflation, February | 3.61% (January: 4.26%) |
| RBI inflation target | 4% |
| Repo rate after February cut | 6.25% (from 6.50%) |
| 1-year OIS | 6.12% |
| 2-year OIS | 5.92% |
| Rupee | Up 20 paise to 87.01 per dollar |
- Inflation slipped under the target for the first time in seven months.
- Rising farm output is expected to keep food prices stable.
- Nomura’s Sonal Varma expects 75 bps of total cuts by end-2025, in April, June and August.
- The OIS market usually prices in policy moves ahead of decisions.
Liquidity steps
- ₹1.5 lakh crore infused through Open Market Operations (OMO).
- $20 billion through dollar-rupee swaps, signalling support for lower borrowing costs.
Risks
- Global headwinds such as tariffs and geopolitical tensions.
- Currency swings that raise import costs and inflation.
- The U.S. Federal Reserve’s stance affecting capital flows.
- Too much easing could revive inflation, and external shocks could cut short the easing cycle.
Significance
- Lower borrowing costs encourage investment and spending, support credit growth and lift market sentiment.
Exam angle
- bps: 25 basis points equals 0.25 percentage point.
- OIS: Overnight Index Swap; OMO: Open Market Operations.
- Repo rate: 6.25% after the first cut in five years.