India’s retail inflation eased to a 7-month low of 3.61 percent in February from 4.31 percent in January, thanks to softening food prices. The latest inflation print not only fell below RBI’s medium-term target of 4 percent—a first since August 2024—but also is the fourth consecutive monthly moderation, which in turn confirms a durable decline in price rise. Food prices, which constitute over 40 percent of the Consumer Price Index, significantly helped in cooling down overall inflation. In February, food inflation fell to 3.75 percent from 5.97 percent the month before, driven by lower prices of vegetables, egg and meat. If softening food prices are widely expected to ease households’ spending burden, the slower-than-expected inflation print firmly indicates the prospect of a policy rate cut next month. Analysts expect a reduction of at least 50 basis points between April and August.
The RBI began its rate-easing cycle with a 25 bps cut last month. It’s now expected that inflation will likely undershoot estimates by 40-50 bps in the current quarter, increasing the chances of a repo rate cut in April, as reflected by the minutes of the monetary policy committee meet last month. For 2024-25, the central bank has projected a headline inflation of 4.8 percent, with the fourth-quarter average at 4.4 percent. But analysts expect it to print lower, providing ample room to ease rates while supporting growth. Liquidity in the banking system has been tight in the last few months due to slower government spending, foreign exchange interventions to support the rupee and heavy selling by foreign portfolio investors. The RBI has infused about `3 lakh crore of durable liquidity and is expected to infuse another `2 lakh crore, which could help in the transmission of rate cuts.
That said, the global dynamics remain volatile and the central bank needs to be vigilant to counter oil price shocks, geopolitical risks and domestic pricing pressures. For instance, core inflation, a better gauge of domestic demand, soared to a 16-month high of 4.2 percent in February owing to higher gold prices, among other reasons. For 2024-25, core inflation is projected at 3.6 percent; but analysts believe it will likely hover around 4 percent in the coming months. Above all, fragile global growth prospects, a full-blown trade war and looming recession in the US may scupper carefully-mapped plans to contain inflation.