Retail inflation eases to four-month low of 5.22% in December

Inflation cools down in December

India’s inflation declined to a four-month low of 5.22 percent in December as compared to 5.48 percent in the previous month, as food prices provided some reprieve, according to data released on January 13.

December, however, marks the fourth consecutive month of over 5 percent inflation. India’s food inflation eased below 9 percent for the first time in four months falling to 8.4 percent in December compared with 9 percent in the previous month.

"Food inflation is moving down gradually with the winter crop soothing prices," said Madan Sabnavis, chief economist, Bank of Baroda.

High inflation has been one of the reasons that the Reserve Bank of India has refused to budge on policy change.

At its December meeting, the Reserve Bank of India held the policy rate at 6.5 percent for the eleventh consecutive time.

Tough call for RBI

The monetary policy committee is expected to take a call on rates in February after the Budget. Experts indicate that a volatility in rupee coupled with over 5 percent print may deter RBI from moving towards a cut.

"With the headline inflation stuck stubbornly above 5 percent, the probability of a rate cut in the Feb 2025 policy review has certainly receded," said Aditi Nayar, chief economist, Icra.

On January 13, rupee declined to its lowest level of  Rs 86.39 against the dollar.

"It will be interesting to see the views of the MPC members on the timing of a rate cut amidst the recent depreciation of the INR vs. the USD," Nayar said.

India’s economy likely slowed down to 6.4 percent in 2024-25, lower than RBI’s estimate of 6.6 percent and the government’s band of 6.5-7 percent growth.

Some believe that RBI may still have room to cut, given that agriculture prospects have improved post a good Kharif harvest.

"Prospects for Rabi sowing also remain conducive with healthy reservoir levels. The Rabi sowing has progressed well and is up marginally compared to last year as of end of December 2024. As a result, inflationary pressures within the food basket should continue to ease. However, given our import dependence for edible oil, it would be crucial to monitor inflation in this category amidst high global edible oil prices and the recent hike in import duty on this item," said Rajani Sinha, chief economist, CareEdge, noting that RBI may consider a 25-bps reduction in policy rates.

Core inflation declined to a three-month low of 3.6 percent in the month.

Food concerns ease

The decline in food inflation was led by pulses, where inflation further eased to 3.8 percent from 5.4 percent in the previous month owing to a high base from previous year. Vegetable inflation, however, remained in double digits at 26.6 percent from 29.4 percent in November.

"A sustained decline in vegetables, cereals, pulses, and milk helped in keeping the retail inflation to a four-month low in December 2024," said Paras Jasrai, senior analyst, India Ratings and Research.

A concern was rise in oil inflation, which inched up to 14.6 percent from 13.3 percent in November.

However, economists believe that inflation is expected to ease in the coming months.

"The quarterly inflation stood at a five-quarter high of 5.6 percent in 3QFY25, however, favourably, it was a tad lower than the central bank’s forecast of 5.7 percent. The central bank has projected retail inflation at 4.5 percent for 4QFY25 which looks a bit optimistic based on Ind-Ra’s assessment. Ind-Ra expects retail inflation to average 4.9 percent in 4QFY25," Jasrai noted.