India's retail inflation cooled to a five-month low of 4.31 per cent in January, down from 5.22 per cent in December, primarily due to moderating food prices. This decline aligns with expectations of easing inflationary pressures as fresh winter produce reached markets, stabilising costs in key food categories.
A Reuters poll had earlier predicted inflation to drop to 4.6 per cent, highlighting a sharper-than-expected fall.
Rural inflation fell to 4.64 per cent in January from 5.76 per cent in December, while urban inflation stood at 3.87 per cent compared to 4.58 per cent in the previous month. The decline in consumer prices raises expectations of a potential rate cut by the Reserve Bank of India (RBI) in the coming months.
The central bank had already reduced its key policy rate by 25 basis points to 6.25 per cent in February, marking its first cut in nearly five years. The move was aimed at supporting economic growth, which is projected to be the slowest in four years.
In addition to RBI’s policy response, the government has also introduced major income tax cuts in its recent budget to boost household consumption. These measures are expected to further stimulate economic activity while keeping inflation within the desired range.
Food inflation, which constitutes about half of the Consumer Price Index (CPI), saw a significant drop, easing to 6.02 per cent in January from 8.39 per cent in December. This is the lowest level recorded since August 2024.
Vegetables played a key role in this moderation, with prices rising by 11.35 per cent year-on-year in January compared to a 26.6 per cent increase in December.
Cereal prices increased by 6.24 per cent in January, slightly lower than the 6.50 per cent rise seen in December.
The price of pulses also grew at a slower pace, rising by 2.59 per cent in January compared to 3.80 per cent in the previous month. Fresh supplies of winter crops have helped stabilise costs, preventing excessive spikes in food prices.
Economists believe that declining vegetable prices have been the biggest contributor to easing food inflation. Many essential food items, except for wheat and vegetable oil, have shown signs of moderation.
The winter season traditionally sees lower food prices, and a strong kharif harvest has further supported this trend.
Despite this easing, inflation remains a concern for policymakers, as the overall rate is still above the central bank’s medium-term target of 4.0 per cent. The RBI’s Monetary Policy Committee (MPC) recently noted that while inflation has declined, risks remain due to global uncertainties.
The central bank expects inflation to moderate further in the coming fiscal year, providing relief to Indian households.
The RBI, under newly appointed Governor Sanjay Malhotra, has projected inflation at 4.2 per cent for the 2025-26 financial year. For individual quarters, it expects inflation to be at 4.5 per cent in the first quarter, 4.0 per cent in the second, 3.8 per cent in the third, and 4.2 per cent in the final quarter.
The risks, according to RBI estimates, remain balanced, suggesting that inflation could continue to stabilise in the near future.
Malhotra pointed out that inflation has come down from its peak of 6.2 per cent in October 2024 due to falling vegetable prices.
For the current financial year, the RBI has projected an inflation rate of 4.8 per cent, with further moderation anticipated in 2025-26, provided there are no weather-related disruptions.
The Economic Survey for 2024-25 also supports this outlook, suggesting that food inflation is likely to decline in the final quarter of the fiscal year. However, it acknowledged that global uncertainties, including fluctuating oil prices and geopolitical tensions, continue to pose risks to India’s inflation trajectory.
The survey, prepared by the Chief Economic Advisor to the Finance Ministry, highlighted that while India has made progress in controlling inflation, challenges remain.
In the broader economic context, India had successfully brought retail inflation down to a four-year low of 5.4 per cent in the 2023-24 fiscal year.
However, external factors such as a weakening rupee, volatile commodity prices, and declining foreign investment could impact overall macroeconomic stability in the future.
During a recent address, the RBI governor emphasised that India’s flexible inflation-targeting framework has played a crucial role in managing price stability.
The post-pandemic economic landscape has required careful policy adjustments, and the current moderation in inflation suggests that these strategies are working effectively.
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