India’s inflation rate showed a notable decline for the second consecutive month in December, registering at 5.22%, just under analysts’ expectations of 5.30%, according to data released by the Ministry of Statistics and Programme Implementation (MoSPI). This trend, marking the slowest price growth since August 2024, has ignited discussions about the Reserve Bank of India’s (RBI) approach to monetary policy amidst slowing economic growth and a volatile currency.

Falling Inflation: A Glimpse of Relief

December’s inflation figure represents a sharp turnaround from October 2024, when inflation surged to 6.21%, breaching the RBI’s 6% tolerance limit. The primary driver of this decline has been easing food prices, which play a crucial role in India’s inflation metrics.

Annual growth in food prices slowed to 8.39% in December from 9.04% in November, with notable declines in the prices of vegetables, cereals, and confectionery. Vegetable inflation fell dramatically, dropping from 42.18% in October to 26.56% in December. However, items like peas, potatoes, and garlic continued to see significant year-on-year price increases, reflecting uneven relief across food categories.

RBI Governor Sanjay Malhotra projected an annual inflation rate of 4.8% for the fiscal year ending March 2025. Analysts attribute this easing of inflation to seasonal corrections in vegetable prices, monsoon harvest arrivals, and robust winter crop yields supported by adequate cereal buffer stocks.

Economic Slowdown and Policy Implications

While lower inflation provides room for the central bank to consider rate cuts, the broader economic scenario complicates the decision-making process. India’s GDP growth slowed to 5.4% in the second fiscal quarter ending September 2024, marking a near two-year low. This deceleration raises concerns about the sustainability of the country’s economic momentum.

Analysts, including Harry Chambers of Capital Economics, anticipate that the RBI could initiate a rate-cutting cycle during its next Monetary Policy Committee (MPC) meeting in February. Chambers expects a 25 basis points (bp) reduction in the repo rate to 6.25%. Such a move could stimulate demand and support the slowing economy.

However, the RBI’s policy flexibility is constrained by the weakening rupee, which depreciated to a record low of 86.58 against the dollar on Monday. A depreciating currency exerts upward pressure on imported goods’ prices, potentially stoking inflation and forcing the central bank to maintain elevated interest rates to stabilize the rupee.

Transition in RBI Leadership

The RBI is undergoing a leadership transition that could influence its policy direction. Former Governor Shaktikanta Das, known for his cautious stance, was succeeded by Sanjay Malhotra in December 2024. Analysts speculate that Malhotra may adopt a less hawkish approach, potentially paving the way for a rate-cutting cycle to support growth.

Broader Economic Outlook

India’s economic recovery in 2025 remains uncertain, with Bank of America (BofA) analysts downgrading GDP growth forecasts for the fiscal year ending March 2025 from 6.8% to 6.5%. While the RBI projects a slightly higher growth rate of 6.6%, concerns persist about uneven performance across sectors.

BofA notes that agriculture, fuel consumption, core sector recovery, and air traffic are likely to remain robust, while credit growth, fiscal indicators, and consumption trends appear subdued. This mixed outlook underscores the challenges policymakers face in balancing inflation management, currency stability, and growth stimulation.

The Road Ahead

The interplay between declining inflation, a slowing economy, and a depreciating rupee places the RBI in a challenging position as it prepares for its February MPC meeting. While lower inflation strengthens the case for interest rate cuts, external factors such as currency volatility and global economic uncertainty may limit the central bank’s ability to act decisively.

As India navigates these complexities, the trajectory of its monetary policy will be critical in shaping economic recovery and investor confidence. The balance between supporting growth and maintaining macroeconomic stability will define the RBI’s approach in the coming months.

(Adapted from CNBC.com)

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