India’s Retail Inflation Drops to Seven-Month Low in February

India’s retail inflation eased to a seven-month low of 3.61% in February 2025, as food inflation fell below 4% for the first time in nearly two years. This decline strengthens expectations of a back-to-back rate cut in the upcoming April meeting of the Reserve Bank of India (RBI). The data, released by the government on March 12, indicates a broad-based moderation in inflation, particularly in perishable goods and protein-based food items.

Food Inflation Sees Significant Moderation

The decline in consumer price index (CPI) inflation marks only the third time in the current fiscal year that inflation has dropped below 4%. February’s inflation rate was lower than the median estimate of 3.8% projected by a Moneycontrol (MC) poll of 19 economists.

Vegetables and Pulses Lead the Decline

One of the key factors behind this decline was the deflation in vegetable prices, which fell by 1.1% year-on-year compared to an 11.4% rise in January. This contributed to food inflation easing to 3.75%, the lowest in 21 months. Additionally, pulses, which had been on an upward trajectory, recorded deflation after rising 2.6% in January.

Mixed Trends in Fruits and Edible Oils

While most food categories showed a decline, fruit and edible oil prices witnessed an upward trend. According to Madan Sabnavis, Chief Economist at Bank of Baroda, “The problem areas appear to be fruits and vegetable oils. The latter has also been affected by the volatile rupee, which has increased the cost of imports.”

Core Inflation Rises Amid Lower Headline Inflation

While food inflation eased, core inflation (which excludes food and fuel) surged to its highest level in seven months. The main driver behind this rise was the sharp increase in gold prices, which significantly impacted miscellaneous goods inflation.

Gold Prices and Personal Care Costs Surge

• Miscellaneous goods inflation rose to 4.8% in February, up from 4.4% in January.
• Personal care and effects inflation surged to 13.6%, compared to 10.6% in the previous month.

Madhavi Arora, Chief Economist at Emkay Global, noted, “The moderation in food inflation has been offset by the sharp rise in core inflation, primarily due to the spike in gold prices and the depreciation of the Indian rupee.”

Implications for RBI’s Monetary Policy

The decline in inflation below RBI’s target of 4% has increased the likelihood of another repo rate cut in April. The Monetary Policy Committee (MPC) had already implemented a 25 basis points (bps) rate cut in February, reducing the policy rate from 6.5% to 6.25%.

Further Rate Cuts Expected

• Economists anticipate another 25 bps rate cut in April 2025, possibly followed by another cut in June or August, depending on GDP growth for Q4 FY2025.
• According to Aditi Nayar, Chief Economist at ICRA, “The February CPI inflation print falling below 4% has strengthened expectations of a consecutive 25 bps rate cut in the April MPC meeting.”

Long-Term Inflation Projections and Challenges

Despite the short-term decline, inflation is expected to moderate to 3.8% by Q3 FY2026, with the fiscal year closing with a policy rate of 5.75%. However, challenges remain in monetary policy transmission.

Summary of Key Highlights