Much of the decline in headline inflation has been driven by softening food prices.
Mar 13, 2025 06:51 IST First published on: Mar 13, 2025 at 06:51 IST
Data released by the National Statistics Office on Wednesday showed that retail inflation has continued to moderate, now falling below the RBI’s target of 4 per cent. Inflation, as measured by the consumer price index, declined to a seven-month low of 3.61 per cent in February. Retail inflation has now averaged 3.9 per cent in the quarter so far (January-February). Analysts expect inflation for the entire quarter (January-March) to remain well below the RBI’s most recent forecast of 4.4 per cent. This data is the last print available to the RBI’s monetary policy committee before its next meeting scheduled in April.
Much of the decline in headline inflation has been driven by softening food prices. The consumer food price index has fallen to 3.75 per cent in February, from 5.97 per cent in January. Food inflation stood at 10.87 per cent in October last year. Vegetables, which have been a key driver of food inflation in the past, have witnessed a steep correction in recent months. In fact, vegetables slipped into deflation at -1.07 per cent in February. Price pressures, however, remained elevated in categories such as oils and fats, fruit and cereals. But with March this year not witnessing a heatwave so far, it suggests that a repeat of the adverse conditions last year is unlikely. This bodes well for food production. Alongside, core inflation also remains subdued. Price pressures were muted across most segments such as education and health, transport and communication, recreation and amusement — the only exception was the personal care segment. Higher inflation in this segment has been attributed to higher raw material prices by some analysts.
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In its last meeting in February, the MPC had voted unanimously to lower the policy repo rate by 25 basis points to 6.25 per cent. The latest inflation data will only increase the odds of the MPC cutting rates when it meets next. Alongside, further easing of liquidity conditions will aid in the transmission of the rate cuts. The question, now, is: To what extent can the MPC cut rates further to support economic activity? As per the RBI’s most recent forecast, inflation has been pegged at 4.2 per cent in 2025-26, with the first half at 4.25 per cent and the second half at 4 per cent. At current levels, this translates to a real interest rate of around 2 per cent. Former members of the MPC have in the past argued that a real interest rate of 1-1.5 per cent is enough to achieve the central bank’s inflation target. This implies that there is space for deeper cuts. While global factors may also play a role, to what extent policy is eased further will depend on how the inflation-growth dynamic evolves.
