India’s December inflation rate dropped for the second consecutive month, falling to 5.22% on an annual basis, which was below the 5.30% forecast by analysts polled in Reuters.
Reserve Bank of India, India’s central banking institution (RBI), could have more flexibility to cut interest rates in order to boost economic growth.
The Ministry of Statistics and Programme Implementation, (MoSPI), reports that this is the lowest rate of increase in prices since August 2024.
This figure is a welcome relief following the October spike in inflation of 6.21 %, which exceeded RBI’s tolerance level of 6%.
This is in line with the RBI Governor Sanjay malhotra’s forecast of 4,8% inflation for fiscal year 2025.
Food inflation is declining but there are still challenges
Inflation in the food sector, which is a major component of inflation in general, fell to 8,39% from 9,04% in Novembre.
In October, the MoSPI reported a significant drop in prices for vegetables. The overall inflation rate in this category dropped to 26.56 % from a high of 42.18 %.
Sugar, cereals and confectionery were also among the staples that saw their price increases slow down.
Nevertheless, some commodities such as peas and potatoes continued to experience steep price increases year on year.
The seasonal arrival of winter crop and the stable harvest from the monsoon are likely to reduce the pressure on food prices in the next few months.
Rajani Sinha is the chief economist at CareEdge Ratings. She said that agriculture has a positive outlook with good Kharif output.
Healthy reservoir levels also continue to be favorable for the prospects of Rabi sowing. As of the end of December, 2024, Rabi sowing is progressing well. It has increased marginally in comparison to last year. Inflationary pressures in the food basket will continue to decrease.
She said that, “However,” given the fact that we are dependent on imported edible oils, it is important to keep an eye on inflation, especially in light of high prices for global edible oil and recent increases in import duties.
RBI takes policy measures in response to slowing GDP
India’s economy has lost momentum. The GDP grew by just 5.4% during the second fiscal quarter, ending in September. This is a two-year-low.
Slowing economic growth is a major reason for RBI officials to take a more accommodating stance.
Harry Chambers said, in a note distributed on Monday after the release of data:
As for the implications of policy, the data today, combined with the slowing of the economy and the new leadership of the RBI in a less hawkish way suggest the central bank is likely to start the easing process at its next MPC Meeting scheduled for February. Our forecast is a 25bp reduction in the repo to 6.25 percent.
Bloomberg Economics predicts that the RBI will play catch-up in February with a rate reduction of 50 basis points, and then another 100-bps through 2025.
By the end of the year, the rate would be at 5.0%.
Rupee depreciation complicates RBI’s decisions
The weakening Indian Rupee is a threat to the monetary policy despite a lowering of inflation.
The rupee fell to an all-time low on Monday of 86.58 US dollars.
The RBI could be forced to increase interest rates in order to stabilize the rupee and attract foreign capital, thereby delaying any rate reductions.
The RBI maintained rates at 6.5% during December under the former governor Shaktikanta das.
In the coming months, Malhotra will have to balance the delicate tasks of inflation control, stimulating growth, and maintaining currency stability.
Analysts remain cautious in their assessment of India’s recovery, despite the easing inflation.
In the short term, external factors, such as a stronger dollar and growth headwinds will likely influence policy.
As new information becomes available, this post India’s Inflation Slows Down to 5.22% by December: Strengthening Case for Rate Cuts may be updated.
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