India's retail inflation slows to 4-month low; will RBI go for a rate cut?

India's retail inflation eased to a four-month low of 5.22% in December 2024 as compared to 5.48% in November 2024, thanks to a moderation in food prices. The corresponding inflation rates for rural and urban areas stood at 5.76% and 4.58%, respectively, down from 5.95% and 4.89%, respectively, during the same period last year, the latest data released by the Ministry of Statistics & Programme Implementation (MoSPI) shows.

The government says during December 2024, a significant decline in inflation was observed in items like vegetables, pulses & products, sugar and confectionary, personal care & effects, and cereals and products, etc.

The food inflation, based on the All India Consumer Food Price Index (CFPI), for December 2024 stood at 8.39% as compared to 9.04% in the previous month. The corresponding food inflation for rural and urban was 8.65% and 7.90%, respectively.

Aditi Nayar, Chief Economist and Head - Research & Outreach, ICRA Limited, says while the CPI inflation declined to 5.2% in December 2024 from 5.5% in November 2024, the pace of the correction was narrower than expected. "In sequential terms, the dip was driven by food and beverages, even as the YoY inflation for fuel and light, and pan, tobacco and intoxicants recorded mild upticks."

The one-year inflation data trend shared by the ministry shows that after December 2023, the inflation rate for both CPI(General) and CFPI was declining till May 2024. Retail inflation reached its lowest point during this period in July 2024. However, both the retail and food inflation were the lowest in the last four months in December 2024.

The ministry data shows the housing inflation rate for December 2024 stood at 2.71%, while the corresponding inflation rate for November 2024 was 2.87%. Notably, the housing index is compiled for the urban sector only.

The top five items with the highest year-on-year rise in inflation at all India levels in December 2024 were peas (89.12%), potato (68.23%), garlic (58.17%), coconut oil (45.41%) and cauliflower (39.42%). The key items that saw the lowest inflation were jeera (-34.69), ginger (-22.93%), dry chillies (-10.32%), and LPG (excluding conveyance) (-9.29%).

The sharp sequential fall in vegetable prices in January 2025 is likely to augur well for the food and beverages inflation print for the month, which is expected to ease to a five-month low of 6.0-6.5% in the month from 7.7% in December 2024. "Consequently, ICRA estimates the headline CPI inflation to soften to ~4.5-4.7% in January 2025 from 5.2% in December 2024," says Nayar.

Notably, nearly 88% of the final 2023-24 area has been sown so far in the ongoing rabi sowing season (up to January 3, 2025; 87.6% of the total area sown in 2023-24). Nayar says even if rabi sowing contracts by 1.4% YoY during the remainder of the sowing season, it will print at par with the total area sown in 2023-24 (70.9 million hectares). "ICRA remains optimistic about the rabi crop, considering the favourable impact of high reservoir storage, ensuing La Nina conditions on sowing and crop yields, and improvement in stocks of DAP fertiliser by end-November 2024. This coupled with robust kharif foodgrain production should help ease inflationary pressures in the near term."

With the headline inflation stuck stubbornly above 5.0%, says Nayar, the probability of a rate cut in the Feb 2025 policy review has certainly receded. "However, the considerable decline in vegetable prices that is underway could convince some MPC members to consider an early cut in the upcoming meeting, to support growth. 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."

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank says the fall in the CPI inflation has been across food and core inflation. "The winter crop arrivals are further expected to keep food prices under check. We expect the inflation trajectory to inch towards the RBIs medium term goal of 4% over the next few months. Softening inflation and growth trajectory provides room for the onset of rate cutting cycle in the upcoming February policy. However, we remain cautious on the global headwinds."