Moderation in inflation creates policy space for RBI to cut rates: NCAER

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Moderation in inflation to five-month low of 4.3 per cent in January has provided RBI more space to cut interest rate in policy meet, according to the monthly economic review by the National Council of Applied Economic Research (NCAER).

Earlier this month, RBI slashed policy repo rate by 25 basis points to 6.25 per cent. The next monetary policy committee meeting is to be held in April.

Even in the face of global headwinds, some of the high-frequency indicators of the Indian economy have turned more benign and the nascent turnaround is evident in indicators like Purchasing Managers' Index for manufacturing, GST collections and non-EV and EV sales, it said.

PMI for manufacturing increased to 57.7 in January, signalling expansion, while PMI for services remained at an elevated level of 56.5.

The economic think tank added that GST collections, gross and net, achieved robust double-digit growth of 12.3 per cent and 10.9 per cent, respectively in January 2025, as compared to subdued a growth of 7.3 per cent and 3.3 per cent in December 2024.

"Moderation in inflation (headline inflation to 4.3 per cent) has opened up more policy space. The agriculture sector is also exhibiting much-needed resilience, which bodes well for both inflation control and rural push to the economy," NCAER Director General Poonam Gupta said.

Another factor that needs to be monitored is the continued outflow of FII flows, she said.

"Empirical studies show that FII flows are driven more by external factors than by domestic ones, and hence are quite volatile in nature. As in the past, the current phase of reversal of FII flows from India is a global phenomenon and is associated with reversals from many other emerging markets," she said.