Retail Inflation Drops to Five-Month Low of 4.31% in January

India's retail inflation eased to a five-month low of 4.31% in January, marking a significant decline from 5.22% in December. The drop was primarily driven by moderating food prices, according to government data released on Wednesday. The inflation figure came in lower than economists' expectations of 4.6%, offering some relief to policymakers and consumers alike.

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Inflation Trends and Food Price Impact

The decline in inflation was largely influenced by softer food prices. Vegetable inflation, which surged 26.6% in December, moderated to 11.35% in January. Cereal prices grew at a slower pace of 6.24% compared to 6.50% in December, while pulses inflation eased to 2.59% from the previous month’s 3.80%. The winter harvest played a crucial role in stabilizing food prices, though concerns remain over the potential impact of unseasonal warmth in March on wheat crops.

With inflation showing signs of easing, the chances of further rate cuts by the Reserve Bank of India (RBI) have strengthened. The central bank, which reduced its key policy rate in February for the first time in nearly five years, is expected to continue its monetary easing approach to support economic growth. The RBI projects inflation to average 4.8% in the current financial year, ending March 31, before easing further to 4.2% next year.

Analysts Opinions on Inflation and RBI's Policy Stance

Economists have highlighted the importance of the inflation slowdown in shaping RBI's future decisions.

Harry Chambers, Assistant Economist at Capital Economics, noted, "The sharp fall in Indian headline consumer price inflation in January reinforces our view that the RBI will continue to loosen monetary policy over the coming months to support the economy." He added that favorable agricultural conditions and a high base effect would likely keep food inflation in check, paving the way for further rate cuts.

Dipanwita Mazumdar, Economist at Bank of Baroda, pointed out that "the softening of CPI is welcoming from a policy standpoint when global uncertainty is at play." She attributed the decline to better vegetable arrivals, a strong Rabi harvest, and government measures to manage food supply efficiently. However, she cautioned about potential risks from imported inflation and fluctuations in global commodity prices.

Sachchidanand Shukla, Group Chief Economist at Larsen & Toubro, emphasized that "the wider expectation of CPI cooling off on the back of receding food and veggie inflation has held out, in turn justifying the RBI's tilt towards supporting growth by cutting the repo rate." He also highlighted a slight rise in core inflation to 3.7% and warned that sustained rupee depreciation could exert upward pressure on input costs.

Conclusion

The decline in retail inflation provides a much-needed cushion for policymakers as they navigate global economic uncertainties. With food prices stabilizing and inflation inching closer to RBI's target, the central bank is likely to maintain its growth-supportive stance. However, external risks such as rising global commodity prices and currency fluctuations remain key factors to watch in the coming months.

Source: Reuters