India’s retail inflation eases to 7-month low of 3.61% in February

India’s retail inflation eases to 7-month low of 3.61% in February

India’s retail inflation eased to a seven-month low of 3.61 percent in February, as food inflation moderated below 4 percent for the first time in nearly two years, cementing hopes of a back-to-back rate cut in the upcoming April meeting of the Reserve Bank of India, according to data released by the government on March 12.

"Broad-based moderation in food inflation, led by perishables and some protein goods, largely led to better-than-expected headline Feb CPI print," said Madhavi Arora, chief economist, Emkay Global.

The decline in February marks only the third time this fiscal year that inflation has dipped below 4 percent. The number was below the MC poll median of 19 economists that pegged inflation at 3.8 percent.

Food inflation eased to 3.75 percent--its lowest reading in 21-months--as vegetable moved to deflation with prices declining 1.1 percent from the previous year, compared with the 11.4 percent rise in January.

Food prices had recorded 6 percent growth over the previous year. Pulses, which have been on a downward trajectory, also witnessed deflation in February compared with 2.6 percent rise in prices.

Fruit and oil inflation, on the other hand, moved up in the month.

"The problem areas appear to be fruits and vegetable oils. The latter has also been affected by the volatile rupee which has pushed up imported cost," said Madan Sabnavis, chief economist, Bank of Baroda.

But the surprise came from core inflation, which rose at its fastest pace in seven months, as gold prices galloped in the month. Miscellaneous goods inflation rose to 4.8 percent in February from 4.4 percent in the previous month, as personal care and effect inflation rose to 13.6 percent from 10.6 percent.

"The moderation in food has been partly offset by much higher monthly momentum in core – highest in last seven months! Personal Care and Effects has been the culprit, reflecting the gold price effect, which got a double boost owing to INR depreciation," Arora noted.

More room for RBI

The decline in inflation is likely to help RBI’s Monetary Policy Committee to cut the policy rate further in its April meeting, as the consumer inflation print goes below the RBI target of 4 percent.

The central bank expects inflation to remain muted for the coming year, with FY26 inflation estimated at 4.2 percent. The lower print is also expected to help bring down inflation print for the last quarter.

The MPC had delivered its first rate cut in February, as it reduced the policy rate to 6.25 percent from 6.5 percent.

"The Feb 2025 CPI inflation print falling well below 4% has cemented the expectation of a back-to-back 25 bps rate cut in the April 2025 MPC meeting. This may be followed by another 25 bps repo rate cut either in the June 2025 or the August 2025 meetings, dependant in large part on the next GDP growth print for Q4 FY2025," said Aditi Nayar, chief economist, ICRA.

Despite inflation easing to 3.8 percent by the third quarter of the coming fiscal, rate cuts are likely to be limited, according to economists.

In a poll conducted prior to the GDP data release in February, economists noted that the RBI will cut rates once more after April, with FY26 ending with a policy rate of 5.75 percent.

"We are apprehensive that tight liquidity conditions may delay transmission of policy rate cuts to bank deposit and lending rates," Nayar noted.