RBI likely to cut rates in April MPC meet as inflation drops below 4%: UBS

Swiss investment bank UBS believes an accommodative monetary policy could help India sustain growth amid rising global uncertainties and trade disputes

Swiss investment bank UBS expects the Reserve Bank of India (RBI) to cut interest rates in April, citing a sharper-than-anticipated decline in inflation and improved liquidity conditions. The firm sees room for a total of 50 basis points (bps) of rate reductions in 2025, with the first cut likely in the next monetary policy review, the bank said in a statement on Thursday.

 

Inflation in India falls to seven-month low

India’s Consumer Price Index (CPI) inflation eased to 3.6 per cent year-on-year (Y-o-Y) in February, marking its lowest level since July 2024, government data showed on Wednesday. The decline was primarily driven by a sharp fall in food prices, particularly vegetables, which saw a month-on-month drop of 11 per cent. The latest inflation figure came in below market expectations of 4 per cent and well below January’s 4.3 per cent. 

Food prices cool Feb inflation to 3.61%; IIP rises to 8-month high in Jan

 

 

UBS analysts believe this trend will continue, with inflation in the March quarter likely to undershoot the RBI’s 4.4 per cent projection by 50 bps. The firm expects headline inflation to average 4.2 per cent in the financial year 2025-26 (FY26), down from an estimated 4.7 per cent in FY25.

 

The retail price data available for the month of March (till date) suggest that vegetable prices have continued to soften and some decline is also observed in case of pulses and cereal prices. “That said, we are closely monitoring the average temperature during the month of March (after a warm February link) as higher temperature could adversely impact yields of winter crops including wheat and rapeseed during their maturing phase,” UBS said.

 

Easing inflation creates space for monetary easing

UBS argues that the improving inflation outlook creates space for monetary easing. The firm maintains its view that the RBI will implement a 50-bps cut in the repo rate over the course of 2025, with the first reduction expected as early as April. The central bank’s focus will be on ensuring liquidity support while allowing flexibility in the currency market.

 

Additionally, with the financial year-end approaching in March, UBS anticipates a seasonal rise in liquidity deficit. To address this, the RBI is expected to introduce measures to support the banking system, making a rate cut even more feasible.

 

“With cyclical recovery already underway, we believe monetary policy support in terms of rate cuts, liquidity support and regulatory easing will help strengthen India's domestic growth amid rising global uncertainty (especially US trade policies and the risk of reciprocal tariffs on India),” the UBS statement said.

 

Rising core inflation - not a major concern

While overall inflation has moderated, core inflation (excluding food and fuel) rose slightly to 4 per cent Y-o-Y in February from 3.7 per cent in January. This increase was driven by higher gold prices and a marginal uptick in core services inflation, particularly in personal care, housing, and healthcare.

 

Despite this, UBS does not see core inflation as a major obstacle to rate cuts. The firm believes that as long as headline inflation remains under control and economic growth stays on track, the RBI will prioritise supporting the ongoing recovery through monetary easing.

 

“Looking at the breakup, pick up in core inflation was largely led by personal care and effects, housing, and health segments while inflation in the other segments including clothing and footwear, household goods and services and education remained largely stable in February,” it said.

 

UBS also highlighted global uncertainties that could impact India’s economy, including shifting US trade policies and the potential imposition of reciprocal tariffs on Indian exports. In this context, the investment bank believes that an accommodative monetary policy, through rate cuts, liquidity support, and regulatory easing, could help sustain India’s domestic growth momentum.