Lower food prices drive retail inflation down, sparking calls for rate cut

India’s retail inflation in December cooled, amply backed by a slowdown in food prices, though Wholesale Price Index (WPI)-based inflation rose, government data released this week showed.

While Consumer Price Index-based (CPI-based) inflation declined to 5.2% in December from 5.48% in November, wholesale inflation perked up 2.37% from 1.89 % in November, driven by the increase in prices of food articles, food products, other manufacturing, textiles, and non-food articles, data showed.

The diverging trend between retail and wholesale inflation rates indicates varying pressures on consumers and producers. While retail inflation shows signs of easing, mainly due to food prices stabilizing, wholesale inflation witnessed an upward climb led by expansion in manufacturing costs and specific commodity price increases.

The inflation rate for vegetables continued to ease, dropping to 26.6% in December from 29.4% in November and indicating that fresh harvests have led to a seasonal correction in food prices.

Excluding vegetables, CPI inflation stood at 3.9%, below the RBI’s lower range of tolerance band of 4%.

In addition to the decline in vegetable inflation, ongoing deflation in spices (-7.4% year-on-year) and a fall in inflation of pulses (3.8% y-o-y) and sugar (0.31% y-o-y) have further contributed to the overall decrease in food inflation.

The outlook for agriculture remains positive, with good kharif production. Prospects for rabi sowing also remain conducive with healthy reservoir levels, brokerage CareEdge said in a report.

Given India’s import dependence on edible oil, inflation in this category amid high global prices and the recent hike in import duty on this item will be key.

The easing retain inflation has also sparked calls for an interest rate cut.

CareEdge anticipates headline inflation will fall below 5% by the current quarter of FY25, driven by a moderation in food inflation, allowing the Reserve Bank of India to weigh a 25-basis-points cut in policy rates in the February meeting.

A policy rate cut is around the corner and the Reserve Bank of India’s easing cycle may begin as early as February, brokerage Crisil said in a note.

Food inflation is likely to ease, the global environment is supportive of rate cutting and India’s slowing growth rate has increased calls for a cut, the note from a team led by chief economist Dharmakirti Joshi said.

“Food inflation, the main roadblock for rate cuts, is expected to ease given healthy agricultural production,” the note added.

Though monetary easing is underway in several key economies, there still remains some uncertainty around the extent of the rate cuts, added the note.

German brokerage Deutsche Bank said on Tuesday that the central bank must start the interest rate-cut cycle with a 0.25% reduction in key rates at the next policy review meeting immediately after the budget next month.

Delaying the cuts will only lead to more sacrifice on growth, analysts at Deutsche Bank (DB) said, adding that the Indian central bank also risks falling behind the curve.

“We expect the RBI to cut the policy rate by 0.25% each in February and April monetary (reviews), bringing the repo rate down to 6% in H12025,” the brokerage said.

Monetary transmission in India typically lags by at least three quarters, justifying an RBI rate cut starting in February, it said.

“We believe the sooner the rate cuts are delivered, the lesser will be the growth sacrifice,” it added.