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Informist, Wednesday, Feb. 12, 2025

 

By Shubham Rana

 

NEW DELHI – India's retail inflation rate fell more than expected in January, with the last hurdle in the Reserve Bank of India's path to meeting its 4.00% target seemingly clearing up as vegetables prices fell sharply last month. This, economists said, not only vindicates the Monetary Policy Committee's decision on Friday to lower the repo rate after nearly five years, it also increases chances of another rate cut in April.

 

Data released Wednesday showed CPI inflation fell to a five-month low of 4.31% in January, lower than expectations of 4.5%. Inflation has fallen nearly 200 basis points since October, with the usual winter disinflation playing a crucial role in dragging down prices of key food items such as vegetables, a trend economists see continuing until March.

 

As per the latest data, vegetable prices fell 15.7% on month in January, leading to a 2.9% sequential decline in the Consumer Food Price Index--the largest such fall since December 2020. This pulled down the general index of the CPI by 1.0% on-month, which was the biggest sequential decline in 16 months.

 

"Vegetable inflation has been a significant contributor to overall CPI inflation in the recent months, averaging around 27% since January 2024," Rajani Sinha, chief economist at CareEdge Ratings, said in a note. "In fact, just by excluding vegetables, CPI inflation averaged at 3.6% since January 2024, well below the RBI's target of 4%."

 

Other food items that posted month-on-month fall in prices in January were pulses, eggs, and spices, brightening the outlook for food inflation which fell to a five-month low of 6.02%, as indicated by RBI Governor Sanjay Malhotra last week. While announcing the 25-basis-point rate cut on Friday, Malhotra had noted the role of "good kharif production, winter-easing in vegetable prices, and favourable rabi crop prospects" for the same.

 

However, the extent of the winter disinflation for vegetables might be more than what the central bank has anticipated. According to Paras Jasrai, senior economic analyst at India Ratings & Research, CPI inflation could come in at 3.9-4.0% in February and March. This could lead to the average for Jan-Mar undershooting the RBI's forecast of 4.4%. However, Jasrai warned that if temperatures stay high in March, rabi crop production could be hit, slowing down the pace with which food inflation eases.

 

Last month was the third-warmest January in 125 years, with the all-India mean temperature 0.94 degree Celsius higher than average, according to India Meteorological Department.

 

NON-FOOD FOR THOUGHT

Even as inflation is moving closer to 4.00%, the MPC's interest rate decisions have been made complicated by a sharp fall in the rupee and US President Donald Trump's trade policies. This week's massive dollar sales notwithstanding, the RBI has loosened its grip on the exchange rate under Malhotra, with the governor saying on Friday that day-to-day movements should not be the focus.

 

Under former governor Shaktikanta Das, the rupee had weakened by 1.9% against the greenback in 2024. In the two months since then, the rupee has fallen 2.3% and was down as much as 3.5% when it hit an all-time low of 87.95 a dollar on Monday after which the RBI threw caution to the winds and sold around $15 billion in the spot market to pull back the exchange rate. According to the central bank, a 5?preciation in the rupee raises inflation by around 35 bps.

 

The RBI's latest inflation forecasts assume an exchange rate of 87 a dollar.

 

Crucially, while Malhotra on Friday did acknowledge the upside risk to inflation from the rupee's weakness, he pointed to the root cause of the Indian currency's tribulations: global uncertainty. "Just the uncertainty in itself is something which is worrisome because that has direct impact on growth, that has direct impact on investment decisions, that has direct impact on consumption expenditure decisions which get deferred. So, let us keep in mind that and lot of appreciation of the dollar and the depreciation of the rupee is actually linked to this uncertainty."

 

The minutes of the February meeting of the MPC will be released next week and the rupee's depreciation and the global trade scenario should feature rather prominently in the statements of the committee's members. How these forces pan out over the next two months could also influence the MPC's interest rate decision in April, according to Bank of Baroda Chief Economist Madan Sabnavis.  End

 

Edited by Ashish Shirke

 

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