A sharp decline in vegetable-led food prices pushed retail inflation based on the Consumer Price Index (CPI), down by 91 basis points to a five-month low of 4.3 per cent in January. Economists believe this creates the necessary headroom for another policy rate cut in April.
“A sharp decline of 237 basis points was observed in food inflation in January 2025 compared to December 2024. The food inflation in January 2025 is the lowest since August 2024,” a statement by the Statistics Ministry said. Apart from vegetables, eggs, pulses & products, cereals & products, education, clothing and health also saw lower inflation.
A significant decline in both headline and food inflation in rural areas was observed in January. It fell to 4.64 per cent in January from 5.76 per cent in December. Rural food inflation stood at 6.31 per cent in the same month compared to 8.65 per cent in the corresponding month. Urban areas too saw a sharp decline in headline inflation to 3.87 per cent from 4.58 per cent. While food inflation fell to 5.33 per cent from 7.9 per cent.
However, there is no relief in core inflation (deducting inflation of volatile items such as food and fuels). Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said that core inflation inched up slightly to 3.7 per cent. Also, the pace of rupee depreciation will need to be closely watched for spillovers on domestic inflation. “We expect the inflation trajectory to remain benign in the months ahead to provide room for another 25bp of rate cut by the MPC,” she said.
Aditi Nayar, Chief Economist at ICRA said the growth-inflation outlook suggests that there is room for another 25 bps rate cut in either April or the June 2025 meetings of the MPC. “The exact timing of the same would depend on the incoming data, global developments, and the movements in the USD/INR pair,” she said.
Industrial Growth
Meanwhile, factory output growth, based on the Index of Industrial Production (IIP) slowed to 3.2 per cent in December from 5 per cent in November, mainly due to a slowdown in manufacturing. Rajani Sinha, Chief Economist at CareEdge, said that the output of capital and infrastructure/construction goods have shown an optimistic performance which is a positive from an investment scenario. The Centre’s continued thrust on capital expenditure bodes well for these segments.
“Looking forward, the Union Budget’s focus on boosting consumption and continued emphasis on capex remains positive for supporting the recovery in consumption and investments, both of which remain extremely crucial for the industrial activity,” she said.