India’s inflation slows to 5.22% in December, strengthening case for rate cuts

India’s inflation rate fell for the second month in a row in December, reaching 5.22% year-on-year, below the 5.30% predicted by analysts polled by Reuters.

The data could provide more leeway for India's central bank- The Reserve Bank of India (RBI) to consider cutting interest rates to support economic growth.

According to the Ministry of Statistics and Programme Implementation (MoSPI), this marks the slowest pace of price increases since August 2024.

The figure offers some relief after October’s inflation spike of 6.21%, which breached the Reserve Bank of India’s (RBI) tolerance limit of 6%.

The easing inflation aligns with RBI Governor Sanjay Malhotra’s projection of 4.8% inflation for the fiscal year ending March 2025.

Food inflation declines but challenges persist

Food inflation, a critical component of overall inflation, declined to 8.39% in December from 9.04% in November.

The MoSPI noted significant reductions in vegetable prices, with overall inflation in the category dropping to 26.56% from October’s high of 42.18%.

Staples such as sugar, cereals, and confectionery also saw a slowdown in price growth.

However, certain commodities, including peas, potatoes, and garlic, continued to record steep year-on-year price increases.

Despite these challenges, the seasonal arrival of winter crops and a stable monsoon harvest are expected to ease food price pressures further in the coming months.

Rajani Sinha, chief economist, CareEdge Ratings, said the outlook for agriculture remains positive with good Kharif production.

"However, given our import dependence for edible oil, it would be crucial to monitor inflation in this category amidst high global edible oil prices and the recent hike in import duty on this item," she said.

GDP growth slowdown calls for RBI to take policy action

India’s economic growth has been losing momentum, with GDP expanding by only 5.4% in the fiscal second quarter ending September—a near two-year low.

The slowing growth has amplified calls for the RBI to adopt a more accommodative stance.

Harry Chambers, assistant economist at Capital Economics, said in a Monday note circulated after the data release:

Bloomberg Economics expects the RBI to play catchup with a 50 basis points rate cut in February, followed by further 100-bps of easing through 2025.

That would bring the policy rate to 5.0% by the fourth quarter of this year.

Rupee depreciation complicates RBI’s decisions

Despite easing inflation, the weakening Indian rupee poses a challenge to monetary policy.

On Monday, the rupee depreciated to a record low of 86.58 against the US dollar.

A weaker currency could force the RBI to maintain higher interest rates to attract foreign capital and stabilize the rupee, potentially delaying rate cuts.

Under former Governor Shaktikanta Das, the RBI held rates steady at 6.5% in December.

His successor, Malhotra, faces the delicate task of balancing inflation control, growth stimulation, and currency stability in the months ahead.

While easing inflation provides room for optimism, analysts remain cautious about India’s economic recovery.

Growth headwinds and external pressures, including a strong dollar, are likely to influence policy decisions in the near term.