Economic Update: Inflation Trends
The Indian Ministry of Statistics has reported a decline in the inflation rate for February, which now stands at 3.61%. This figure is notably below expectations, attributed primarily to decreasing vegetable prices.
Economists had anticipated a rate of 3.98% for February, marking the first instance since last summer that inflation has fallen below the Indian Central Bank’s target of 4%. This represents the lowest monthly inflation rate observed since July 2024.
Food Price Dynamics
The inflation rate for food prices, a significant component of the consumer price index, reached 3.75%. Notably, vegetable prices decreased by 1.07% year-on-year, a stark contrast to the 11.35% rise recorded in January. Additionally, legume prices dropped by 0.35% in February, following a 2.59% increase the previous month.
Conversely, the growth rate for grain prices and related products has levelled off at 6.1% in February, unchanged from January’s 6.24%.
In a report issued on March 5, analysts from Bank of America highlighted that vegetable prices have plummeted since October, driven by an increase in supply, particularly for potatoes and tomatoes. They noted the potential for a price correction starting in early March, given the looming risks of heat waves and weather-related disruptions in agriculture.
Implications for Monetary Policy
The slowing trajectory of inflation coupled with modest economic growth in India, the world’s fifth-largest economy, may afford the Indian Central Bank the opportunity to implement further interest rate reductions. Following the first rate cut in nearly five years, which occurred last month and lowered the repo rate by 25 basis points to 6.25%, the decision was influenced by a weaker-than-expected GDP growth rate of 6.2% in the fourth quarter. Overall, the Indian economy expanded by only 6.5% in the fiscal year ending March 2025, a significant decline from the previous year’s growth of 9.2%.
However, the Monetary Policy Committee, chaired by Martzi Al-Hindi, has expressed ongoing concerns regarding external headwinds in global markets, particularly amidst escalating trade tensions.
“Global economic outlook remains challenging,” the committee noted, citing declining inflation, geopolitical instability, and political uncertainty as significant factors. Furthermore, a strong U.S. dollar continues to exert pressure on emerging market currencies, amplifying volatility in financial markets.
Analysts at Bank of America remarked that the country’s monetary policy is now firmly oriented towards supporting growth, as average inflation expectations hover around the Reserve Bank of India’s goal of 4%. They project potential interest rate cuts amounting to 100 basis points by the end of 2025, inclusive of the recent 25-point reduction.
For more updates, subscribe to our channel on Tilekram.
