Context : Inflation Trends
- Retail Inflation: India’s retail inflation moderated to 5.22% in December 2024, a four-month low, down from 5.48% in November.
- Food Inflation: The food inflation rate decreased to 8.39% in December from 9.04% in November, driven by a reduction in prices of pulses and vegetables.
- Core Inflation: Core inflation (non-food, non-fuel) inched lower to 3.6%, indicating subdued demand conditions in the economy.
Relevance : GS 3(Economy )
Sector-Specific Inflation:
- Food & Beverages: The food and beverages segment, accounting for 45.86% of the total Consumer Price Index (CPI) weight, saw a reduction in inflation from 8.20% in November to 7.69% in December.
- Vegetables: Inflation for perishables like vegetables decreased significantly from 29.33% in November to 26.56% in December.
- Cereals and Pulses: The inflation rate for cereals fell to 6.51% from 6.88% in November, while pulses saw a decline to 3.83% from 5.41%.
- Milk & Dairy: Inflation for milk and dairy products slightly moderated to 2.80% from 2.85%.
- Fuel and Oils: Inflation for oils and fats rose to 14.6%, the highest in three months, signaling potential concerns over fuel-related price pressures.
RBI’s Response and Outlook:
- Monetary Policy Caution: Experts suggest the RBI will likely pause on interest rate cuts in its February 2025 policy meeting, despite inflation showing signs of moderation. The RBI is expected to wait for clearer signs of long-term inflation control before initiating rate cuts.
- Rate Cut Timing: There is speculation that the RBI may begin the rate cut cycle in April 2025, contingent on ongoing global economic conditions and domestic inflation trends.
- Global Pressures: The U.S. Federal Reserve’s policy decisions and depreciation pressures on the Indian rupee may influence the RBI’s actions, with global uncertainties weighing on any preemptive rate cut decisions.
Factors Influencing Inflation:
- Rabi Sowing: Strong rabi sowing prospects are expected to help in further cooling off food inflation in the coming months, as agricultural output improves.
- Food Inflation: Despite easing in December, food inflation remains a significant concern, averaging 8.4% for the current fiscal year, higher than the 7.5% target for fiscal 2024. Elevated food inflation continues to be a key challenge for the economy.
Future Outlook:
- Subdued Demand: The RBI and experts emphasize the importance of managing demand and inflation expectations. While inflation is expected to ease, the persistence of elevated food prices and the ongoing global economic uncertainty will likely keep inflation above the RBI’s target range for some time.
- Cautious Approach: Analysts predict the RBI will take a cautious approach to rate cuts, balancing inflation control with broader economic stability, especially with expectations of a slower global economic recovery.
Expert Opinions:
- Ind-Ra and HDFC Bank: Economists from India Ratings & Research and HDFC Bank argue that while current inflation trends are promising, the RBI will wait for further clarity before adjusting rates, particularly given the pressure on food prices and global economic conditions.
- Crisil’s Perspective: Crisil’s senior economist highlighted that while the inflation trend is positive for monetary policy, elevated food inflation remains a critical concern for the RBI in maintaining price stability.
