India’s retail inflation drops to 7-month low at 3.61% in Feb, fuels expectations of another rate cut

The year-on-year inflation rate based on the All India Consumer Price Index (CPI) for February 2025 stood at 3.61%, marking a decline of 65 basis points from January 2025, the lowest year-on-year inflation since July 2024. The CPI inflation recorded a seven-month low in February 2025 from 4.3% in January 2025, thus coming below the mid-point of the MPC's medium term target range, led by cooling in food inflation.

The sharp decline in headline and food inflation in February was mainly due to lower inflation in vegetables, eggs, meat & fish, pulses & products, and milk & products, the data shared by the Ministry of Statistics & Programme Implementation shows.

The food inflation rate, based on the Consumer Food Price Index (CFPI), was recorded at 3.75% in February 2025, with rural and urban inflation rates at 4.06% and 3.20%, respectively. Food inflation saw a notable decline of 222 basis points from January 2025, reaching the lowest level since May 2023.

The rural sector experienced a significant drop in inflation rates, with the headline rural inflation dipping from 4.59% in January to 3.79% in February 2025, and food inflation in this category declining sharply from 6.31% to 4.06%. The urban sector inflation also fell from 3.87% in January to 3.32% in February 2025, while the urban food inflation dropped significantly from 5.53% to 3.20%.

Despite a sharp fall in inflation, the sequential uptick in vegetables inflation in March 2025 is likely to prevent a further softening in the food and beverages inflation print in the month, after the substantial cooling seen over the past four months, according to the ratings agency ICRA. "This would push up the CPI inflation print mildly to ~3.9-4.0% in the next month. Overall, the CPI inflation is now expected to average at 3.9% in Q4 FY2025, well below the MPC's projection of 4.4% for that quarter," said Aditi Nayar, Chief Economist & Head- Research & Outreach.

Nayar adds that the February 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, depending in large part on the next GDP growth print for Q4 FY2025. Nevertheless, we are apprehensive that tight liquidity conditions may delay transmission of policy rate cuts to bank deposit and lending rates."

Here's how inflation fared in other key categories:

1) Housing inflation (urban sector only) was recorded at 2.91% in February, up from 2.82% in January.

2) Fuel & light inflation was recorded at -1.33%, which is an improvement from -1.49% in January.

3) Education inflation remained stable at 3.83%, while health inflation rose slightly to 4.12% from 3.97% in January.

5) Transport & communication inflation increased slightly to 2.87% from 2.76% in January.

IIP growth better than expected

IIP growth improved to a higher than expected 5.0% in January 2025, led by manufacturing and mining. The use-based data is less enthusing, with a sequential YoY pickup seen in only two segments (consumer non-durables and primary goods) amidst a slowdown in the other four. "Reflecting the base effect related to the leap year in 2024, the YoY performance of most of the available high frequency indicators deteriorated in February 2025 vis-à-vis January 2025. ICRA expects the IIP expansion to moderate to ~3.0-4.0% in February 2025 (+5.6% in February 2024) from 5.0% in January 2025 (+4.2% in January 2024)," said Nayar.