People buy vegetables at a vegetable market in Siliguri, India, on December 28, 2024.
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India’s inflation declined for a second straight month year on year, coming in just below expectations at 5.22% in December, boosting the case for prospective interest rate cuts.
Analysts polled by Reuters had forecast a 5.30% reading. The December print from the Ministry of Statistics and Programme Implementation marked the slowest pace of growth in prices since August 2024.
Annual growth in food prices — a key metric — eased to 8.39% in December from 9.04% in November, with the MoSPI noting a “significant decline” in inflation in vegetables, sugar, cereals and confectionary, among others. Despite this, prices for peas, potatoes and garlic observed the three highest year-on-year hikes last month.
In October, the country’s inflation rate had hit a 14-month high of 6.21%, breaching the 6% tolerance limit of the Reserve Bank of India.
Reserve Bank of India Governor Sanjay Malhotra on Dec. 24 forecast inflation rate of 4.8% for the fiscal year ending March 2025.
“In terms of the policy implications, today’s data – combined with a slowing economy and the change of leadership at the RBI to a seemingly less hawkish direction – suggest that the central bank will kick off the easing cycle at the next MPC meeting in February. We are forecasting a 25bp cut to the repo rate, to 6.25%,” Harry Chambers, assistant economist at Capital Economics, said in a Monday note circulated after the data release.
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In the statement, Malhotra wrote that food inflation pressures were likely to linger in the fiscal third quarter, and only start easing from the fourth quarter.
This will be due to a seasonal correction in vegetable prices and monsoon harvest arrivals, as well as a likely good output for winter crops and adequate cereal buffer stocks. Agriculture is a major component of India’s GDP.
The softer inflation reading offers more room to the RBI to cut rates, amid slowing growth in the country. India’s economy expanded by just 5.4% in its second fiscal quarter ending September, well below estimates by economists and close to a two-year low.
However, a weakening rupee has made it tougher to loosen the monetary policy. On Monday, the currency depreciated to a record low of 86.58 against the dollar, which could force the RBI to keep rates elevated in its bid to support the currency.
The RBI, under the previous governor, Shaktikanta Das, held rates at 6.5% in its last monetary policy meeting in December in a split decision. Das, whose term ended on Dec.11, was succeeded by Malhotra.
Bank of America analysts said in note earlier this month that India’s GDP was expected to recover in 2025, but “the strength and rally of the recovery seems uncertain for now.”
The bank sees areas such as agricultural production, fuel consumption, core sector recovery and air traffic to stay strong, while credit growth, fiscal and consumption indicators to remain soft.
in November, BofA had downgraded India’s GDP forecast for fiscal year ending March 2025 to 6.5% from 6.8% — lower than the RBI’s forecast of 6.6%.
— CNBC’s Ruxandra Iordache and April Roach contributed to this article.
