People buy vegetables at a vegetable market in Siliguri, India, December 28, 2024.
Nuphoto | Nuphoto | Getty Images
India’s annual inflation fell for the second consecutive month on year, coming in just below expectations at 5.22% in December., which strengthens the case for potential interest rate cuts.
Analysts polled by Reuters expected an increase of 5.30%. The December report from the Ministry of Statistics and Program Implementation marks the slowest pace of price growth since August 2024.
In October, the country the inflation rate reached its highest level in 14 months, at 6.21%exceeding the Reserve Bank of India’s tolerance limit of 6%. Sanjay Malhotra, Governor of the Reserve Bank of India December 24 forecasts an inflation rate of 4.8% for the fiscal year ending March 2025.
Annual food price growth – a key indicator – fell to 8.39% in December from 9.04% in November, with MoSPI noting a “significant decline” in inflation in vegetables, sugar, cereals and confectionery, among others. Overall vegetable inflation fell to 26.56% in December, down from November’s 29.33% but down from October’s figure of 42.18%. Despite this, 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 were likely to persist into the third fiscal quarter, before starting to ease in the fourth. This will be due to a seasonal correction in vegetable prices and the arrival of monsoon harvests, as well as likely good production of winter crops and adequate buffer stocks of cereals.
The slowdown in inflation in December gives the RBI more room to cut rates, amid slowing growth in the country. India’s economy grew just 5.4% in its fiscal second quarter ending in September, well below economists’ estimates and close to a two-year low.
“In terms of policy implications, today’s data – combined with the slowing economy and the RBI’s shift in direction to a seemingly less hawkish direction – suggests that the central bank will initiate the easing cycle when of the next MPC meeting in February We expect the repo rate to be cut by 25 basis points, to 6.25%,” said Harry Chambers, deputy economist at Capital Economics, in a note released Monday after the release of the data. data.
However, a weakened rupee made it more difficult to ease monetary policy. On Monday, the currency depreciated to an all-time low of 86.58 against the dollar, which could force the RBI to maintain high rates in a bid 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, was replaced by Malhotra.
Analysts at Bank of America said earlier this month that India’s GDP is expected to recover in 2025, but noted that “the strength and extent of the recovery appears uncertain at this time.”
The bank believes that areas such as agricultural production, fuel consumption, core sector recovery and air traffic are expected to remain strong, while credit growth, fiscal and consumption indicators will remain weak.
in November, BofA had lowered India’s GDP forecast for the fiscal year ending March 2025 from 6.8% to 6.5%, lower than the RBI’s forecast of 6.6% .
— CNBC’s Ruxandra Iordache and April Roach contributed to this article.
