Rate Cut Likely In February? RBI Report Signals Easing Of Inflation - Details

After slowing down in the second fiscal quarter, the Indian economy has started to grow again in the December quarter, as indicated by important activities. According to the Reserve Bank of India's ( RBI ) most recent monthly report on the economy, inflation is expected to average below the 4 per cent  target for the upcoming fiscal year.

Year-on-year (y-o-y) inflation, as captured by the all-India Consumer Price Index (CPI), softened to 5.5 per cent  in November 2024 from 6.2 per cent  in October. This 70 bps drop was on account of a 15 bps month-on-month (m-o-m) decline in prices and a favorable base effect of 55 bps. Food and fuel inflation showed negative momentum, while core inflation (ex-food and fuel) exhibited a mild positive momentum of 20 bps.

Food Inflation

Food inflation eased to 8.2 per cent  in November from 9.7 per cent  in October. The primary drivers of this decline were vegetables, pulses, fruits, and sugar, whereas edible oils, fats, and meat inflation picked up. Prices of cereals and non-alcoholic beverages remained unchanged, while spices experienced more pronounced deflation.

Fuel and Core Inflation

Fuel and light deflation deepened slightly, falling to (-) 1.8 per cent  in November from (-) 1.7 per cent  in October, led by softer kerosene and LPG inflation. Core inflation softened slightly to 3.7 per cent  from 3.8 per cent , on account of falls in transport, personal care, and tobacco. However, the inflation rate picked up in housing, recreation, and household goods.

Regional and Sectoral Inflation

Inflation eased to 6.0 per cent in rural and 4.8 per cent in urban areas. States-wise, most of them recorded inflation between 4 per cent  and 6 per cent . Sector-wise, input prices for manufacturing and services increased significantly, with the latter reporting its sharpest increase in 15 months. In manufacturing, selling prices have increased the fastest in the last 11 years and in services the steepest in 12 years.

Important Commodity Trends

During the last fortnight of December (till 19th), rice prices decreased. Prices of wheat, atta, and edible oil continue to be at higher levels. The overall prices of pulses declined. The prices of onions and tomatoes declined. Potatoes have been stable. During this period, the retail price of petrol, diesel, kerosene, and LPG has been static.

Housing Market and Inflation Expectations

The all-India housing price index (HPI) advanced 4.3 per cent  y-o-y in Q2:2024-25, compared with 3.3 per cent  q-o-q. Meanwhile, household inflation perception went up by 30 bps in November, as expectations for the near future were mixed: one-year inflation expectations increased by 10 bps, and three-month expectations fell by 10 bps.

Global Trends In Inflation

Inflation is expected to moderate in G20 economies from 5.4 per cent in 2024 to 3.5 per cent in 2025 and further to 2.9 per cent in 2026. This could open up the space for monetary policy normalisation, although geopolitical risks, trade policy uncertainty, pent up fiscal and currency pressures amidst financial vulnerabilities continue to pose downside risks. Our model-based nowcast of global GDP point towards a moderation in global growth momentum.

Also Read: FY 2025 Expectations: India's GDP To Grow At... - EY Projection | Republic Business