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India's economic landscape experienced a significant shift in November 2024 as retail inflation, measured by the Consumer Price Index (CPI), dipped to a three-month low of 5.48%. This marked a considerable decrease from the October figure of 6.21%, which had breached the Reserve Bank of India's (RBI) tolerance band, reaching its highest point in fourteen months. The November 2023 inflation rate stood at 5.55%, providing further context to the recent decline. This unexpected drop, lower than the median economist prediction of 5.6%, coupled with stable core inflation, has fueled speculation of a potential rate cut by the RBI in its February monetary policy meeting. The decrease in vegetable prices, a key component of the CPI, is largely attributed to the onset of the winter season, a seasonal factor influencing agricultural produce availability and pricing.
The implications of this inflation drop extend beyond immediate market reactions. The RBI's recent stance, as articulated by Governor Sanjay Malthora, emphasizes the importance of maintaining stability, trust, and growth – a threefold approach to economic management. This contrasts slightly with the previous governor, Shaktikanta Das, who, while unveiling the December monetary policy (where the repo rate remained unchanged at 6.5% for the eleventh consecutive time), underscored the need for durable price stability and the restoration of inflation-growth balance. While the RBI projected CPI inflation to average 5.7% in Q3FY24, the actual average for the first two months of the quarter was 5.8%. This necessitates a further moderation to approximately 5.5% in December to align with the RBI's projections, a scenario deemed plausible by numerous economists. The differing emphases from successive governors suggest a potential shift in the RBI's strategic priorities, reflecting the evolving economic conditions and the need for agile policy adjustments.
The decline in Indian inflation stands in contrast to the global economic trend, where many economies are experiencing renewed price pressures. China, for instance, is contemplating an easing of its monetary policy through 2025 to stimulate growth. This divergence highlights the unique circumstances shaping India's economic trajectory. Experts offer varied perspectives on the factors driving the inflation decrease. Sakshi Gupta, principal economist at HDFC Bank, points to the moderation in vegetable prices as a key driver, although acknowledging sequential increases in cereal and edible oil prices. She anticipates a gradual decrease in inflation towards 4.5% by the January-March quarter. Core inflation, excluding volatile food and fuel components, remained flat at 3.7% in November, suggesting that broader economic conditions are not inherently inflationary. This stable core inflation has persisted below 4% for twelve consecutive months, reinforcing the belief that the recent inflation dip is not a fleeting phenomenon.
However, the path towards a February rate cut is not without potential obstacles. Suman Chowdhury, chief economist at Acuite Ratings & Research, acknowledges the increased likelihood of a rate cut but cautions against unforeseen events. A warmer-than-expected winter or currency fluctuations could potentially lead the RBI to postpone the rate cut until April. The call for a rate cut has gained momentum following the lower-than-expected growth figure of 5.4% for Q2FY25. Nevertheless, the RBI's December monetary policy committee (MPC) maintained the status quo on the repo rate, citing prospects for improved economic activity and rising consumer and business sentiments. The MPC statement emphasized the continued risks of multiple shocks to inflation and the importance of durable price stability as a foundation for sustainable high growth. High inflation, the statement notes, negatively impacts consumer purchasing power and could adversely affect private consumption.
A detailed analysis of food inflation reveals further nuances. 'Vegetables' inflation plummeted to 29% in November from 42% in October, significantly contributing to the overall food inflation decline, measured by the Consumer Food Price Index (CFPI), which reached a three-month low of 9.04%. While 'pulses and products' inflation also decreased, 'oils and fats' inflation increased. Economists anticipate a continued decline in food inflation in the coming months, attributing the November spike in oils and fats inflation to elevated global palm oil prices. The moderation in pulses inflation is linked to improved tur and urad crops. Cereals inflation, while currently at 6.9%, is expected to ease due to anticipated higher rice production and smooth mandi arrivals. India Ratings and Research (Ind-Ra) projects CPI inflation around 5% in December, citing favorable base effects and potential challenges from edible oils and personal care products. The confluence of these factors – seasonal shifts in agricultural production, global commodity price dynamics, and the RBI's cautious approach to monetary policy – will ultimately determine the trajectory of India's inflation rate and the timing of any potential rate cuts in the coming months.
Source: Hopes of Feb rate cut grow as November inflation eases to 5.48%