India’s Inflation Eases to 5.22% in December

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India’s Inflation Eases to 5.22% in December, Boosting Rate Cut Prospects

India’s inflation rate declined for the second consecutive month in December, coming in at 5.22% year-on-year, just below the 5.30% expected by analysts polled by Reuters. This marks the slowest pace of price growth since August 2024 and strengthens the case for potential interest rate cuts by the Reserve Bank of India (RBI).

Food prices drive softer inflation

Annual growth in food prices, a critical component of India’s inflation index, eased to 8.39% in December from 9.04% in November. The Ministry of Statistics and Programme Implementation (MoSPI) highlighted significant declines in inflation for vegetables, sugar, cereals, and confectionery.

  • Vegetable inflation: Dropped to 26.56% in December, compared to 29.33% in November and a peak of 42.18% in October.
  • Notable price increases: Despite the overall decline, peas, potatoes, and garlic recorded the highest year-on-year price hikes.

Agriculture, a major contributor to India’s GDP, is expected to stabilize further with seasonal corrections, winter crop harvests, and sufficient cereal buffer stocks. RBI Governor Sanjay Malhotra previously predicted easing pressures in the food sector during the fiscal fourth quarter.

Policy implications and economic outlook

The softer inflation reading comes amid slowing economic growth, with India’s GDP expanding by 5.4% in the second fiscal quarter ending September, close to a two-year low.

“In terms of the policy implications, today’s data – combined with a slowing economy and the change of leadership at the RBI to a seemingly less hawkish direction – suggest that the central bank will kick off the easing cycle at the next MPC meeting in February,” said Harry Chambers, assistant economist at Capital Economics. Chambers forecasts a 25-basis-point cut to the repo rate, reducing it to 6.25%.

However, the depreciating rupee, which hit a record low of 86.58 against the dollar on Monday, poses a challenge to easing monetary policy. The weaker currency could compel the RBI to maintain higher rates to support the rupee.

Changing leadership at the RBI

Under former Governor Shaktikanta Das, the RBI held rates steady at 6.5% during its December meeting. Das’s term ended on December 11, and he was succeeded by Governor Sanjay Malhotra, whose leadership is expected to take a less hawkish stance on monetary policy.

Future economic recovery uncertain

Bank of America (BofA) analysts predict India’s GDP will recover in 2025 but caution that the strength of the recovery remains uncertain. While sectors like agriculture, fuel consumption, and air traffic are expected to stay strong, areas such as credit growth and consumer spending are likely to remain subdued.

In November, BofA downgraded India’s GDP growth forecast for the fiscal year ending March 2025 to 6.5% from 6.8%, slightly below the RBI’s estimate of 6.6%.

India’s easing inflation rate offers the RBI room to consider rate cuts, but challenges like a weakening rupee complicate the outlook. As the central bank’s new leadership navigates these dynamics, the balance between supporting economic growth and stabilizing the currency will shape India’s economic trajectory in the months ahead.

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