Banking Central | Inflation at 6-year low is an opportunity for RBI to give growth another push

Easing vegetable prices have brought down CPI numbers

India’s retail inflation has hit a sweet spot. The Consumer Price Index (CPI) for April cooled to 3.16 percent, down from 3.34 percent in March and the lowest since July 2019, data released the previous week showed.

This drop, driven by an 11 percent year-on-year decline in vegetable prices, offers a rare reprieve to an economy where food costs have long vexed policymakers.

With food inflation slowing to 1.78 percent, the Reserve Bank of India’s monetary policy committee (MPC) has an opportunity to shift gears from its hawkish stance. But with monsoon uncertainties and persistent pressures in other sectors, is this low inflation print a signal for rate cuts or just a temporary breather?

The April numbers are a welcome surprise. Food, which makes up nearly half of the CPI basket, has flipped from villain to saviour. Vegetable prices, known for their volatility, fell 11 percent after a 7.04 percent drop in March. Cereals cooled to 5.35 percent from 5.93 percent and pulses, a perennial headache, saw a 5.23 percent decline.

These shifts have eased the burden on households still reeling from years of price pressures. Headline inflation now sits well below the RBI’s 4 percent target, a stark contrast to the supply-chain chaos and commodity spikes of recent years.

But the picture isn’t all rosy. Peel back the vegetable price plunge and inflation would hover closer to 4.1 percent. Vegetables, with just a 6 percent weight in the CPI, are skewing the headline number. Other categories reveal stickier trends: the miscellaneous group — covering personal care, health and education — posted 5 percent inflation.

Gold prices are inflating personal care costs, while health (4.2 percent) and education (4.1 percent) reflect rising fees and medical expenses. These pressures underscore that inflation remains a mixed bag.

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Still, the stars are aligning for price stability. The India Meteorological Department predicts an above-normal monsoon, which could keep food prices in check. Economists expect CPI inflation at around 3.5 percent for May and an average of 3.5 percent this fiscal, below the RBI’s Q2 and Q3 projections.

Falling crude further sweetens the deal for India, a net oil importer. This backdrop strengthens the case for the MPC, which has cut the repo rate by 25 basis points (bps) each since February to 6 percent, to ease monetary policy to spur growth when it meets for the bi-monthly review from June 4 to 6.

The RBI is at a fork in the road. The April data, paired with a favourable monsoon outlook, present a golden opportunity to bolster India’s growth narrative. A 25 bps rate cut in June could signal confidence without stoking inflationary risks. However, caution may prevail if the MPC decides to wait longer for more evidence of sustainable easing of inflation.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)