According to an HSBC Research report, after retail inflation fell to 3.6 percent in February, the March inflation print is also trending below the RBI's 4 percent target, indicating that the central bank will cut interest rates again next month.

"The RBI has already embarked on a rate cutting cycle and is likely to go in for another 25basis points reduction in the April monetary policy committee meeting, taking the repo rate to 6 per cent," a report from HSBC said.

"Currently, March quarter inflation is trending lower than the RBI's quarterly forecast. While winter crop sowing has been successful, temperature in the coming weeks will be critical as the wheat crop enters the grain-filling stage, according to the report.

Food inflation fell for the second month in a row in February, falling by 1.0% month on month. This was driven by a decrease in vegetable, pulse, egg, fish, and meat prices. However, cereal, sugar, and fruit prices have all risen, according to the report.

Core inflation, which excludes food and fuel, increased across the board in February as gold prices rose sharply. Core inflation, excluding gold, remained firmly below 4% in annual terms and at the long-term average in sequential terms, according to the report.  However, a benign outlook for oil prices (HSBC forecasts Brent at USD73/b in 2025) and Chinese excess capacity are likely to keep core inflation under control.

Putting it all together, the report predicts that headline inflation will average 4% in FY26. In the monetary policy review last month, RBI Governor Sanjay Malhotra announced a 25 basis point cut in the policy rate from 6.5% to 6.25 percent in order to accelerate growth in the face of global uncertainty.

It also highlights that the rupee has depreciated by 4% against the US dollar since October, which could add 30 basis points to inflation, according to FX sensitivities.

He stated that inflation has declined and is expected to continue to moderate, eventually reaching the RBI's target of 4%. HSBC predicts that India's GDP will grow by 6.5 percent. It expects an increase in rural demand after harvest, a growth boost from a lower income tax rate for the middle class, and monetary policy easing to support growth in the April-June quarter. However, weaker goods exports following the global restocking cycle and ahead of US President Donald Trump's tariff threats could be a drag, according to the report.