People buy vegetables at a vegetable market in Siliguri, India, on December 28, 2024.
Nurphoto | Nurphoto | Getty Images
Inflation in India fell for the second month in a row at the annual level, falling slightly below expectations at 5.22% in December., strengthening the case for possible interest rate cuts.
Analysts polled by Reuters had expected a reading of 5.30 percent. The December printout of the Ministry of Statistics and Program Implementation records the slowest pace of price growth since August 2024.
In October is the country the inflation rate reached a 14-month high of 6.21%breaching the Reserve Bank of India’s 6% tolerance limit. Reserve Bank of India Governor Sanjay Malhotra December 24 forecast an inflation rate of 4.8% for the fiscal year ending March 2025.
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 confectionery, among others. Headline inflation for vegetables fell to 26.56% in December, down from 29.33% in November, but down from October’s print of 42.18%. Despite this, the prices of peas, potatoes and garlic recorded the three biggest year-on-year increases last month.
Agriculture is a major component of India’s GDP, and Malhotra previously wrote that pressures in the food sector are likely to persist in the third fiscal quarter, before easing in the fourth. This will be due to the seasonal correction of vegetable prices and the arrival of the monsoon harvest, as well as the likely good production of winter crops and adequate intermediate grain stocks.
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Softer inflation for December gives RBI more room to cut rates, amid slowing growth in the country. India’s economy grew just 5.4% in its fiscal second quarter ended in September, well below economists’ estimates and near a two-year low.
“In terms of policy implications, today’s data – combined with a slowing economy and a shift in RBI leadership in a seemingly less hawkish direction – suggest that the central bank will begin an easing cycle at the next MPC meeting in February. We anticipate a 25bp cut in the repo rate to 6.25%,” said Harry Chambers, associate economist at Capital Economics. The note on Monday circulated after the data was released.
However, weakening of the rupee it made it difficult 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 high in an effort to support the currency.
Under previous governor Shaktikanta Das, the RBI kept rates at 6.5% at its last monetary policy meeting in December in a split decision. Das, whose term ended on December 11 succeeded Malhotra.
Bank of America analysts said in a note earlier this month that India’s GDP is expected to recover in 2025, but noted that “the strength and growth of the recovery appear uncertain for now.”
The bank believes that areas such as agricultural production, fuel consumption, core sector recovery and air traffic are likely to remain strong, while credit growth, fiscal indicators and consumption indicators will remain weak.
in November, BofA cut India’s GDP forecast for the 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.