India’s Retail Inflation Drops to 7-Month Low of 3.61% in February

Food inflation eases below 4% for the first time in nearly two years, boosting prospects of further monetary policy easing by the Reserve Bank of India (RBI).

Retail Inflation Falls Below 4%, Supporting Rate Cut Expectations

India’s retail inflation cooled to a seven-month low of 3.61% in February, driven by a sharp moderation in food inflation, which dipped below 4% for the first time since 2023. The latest Consumer Price Index (CPI) data, released by the government on March 12, has bolstered market expectations for a second consecutive rate cut in April by the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC).

• Lower-than-expected inflation: The February CPI figure came in below the consensus estimate of 3.8%, as per a survey of 19 economists.
• Third sub-4% reading this fiscal year: This marks only the third instance in FY25 where inflation has remained below the RBI’s 4% target.

Food Inflation Drops to 21-Month Low as Vegetables Enter Deflation

A broad-based decline in food prices contributed to the softer inflation reading:

• Food inflation eased to 3.75%, marking its lowest level in 21 months.
• Vegetables saw deflation of 1.1% YoY, a stark reversal from the 11.4% rise in January 2025.
• Pulses, which were on an upward trajectory, recorded deflation, compared to a 2.6% rise in January.

However, not all food categories benefited from easing inflation:

• Fruit prices and edible oil inflation increased, with volatile currency movements contributing to the rise in imported edible oil costs.
• “The problem areas appear to be fruits and vegetable oils. The latter has also been affected by the volatile rupee, which has pushed up imported costs,” said Madan Sabnavis, Chief Economist at Bank of Baroda.

Core Inflation Sees Upsurge Due to Rising Gold Prices

While food prices cooled, core inflation—which excludes volatile food and fuel prices—surged to its highest level in seven months.

• Miscellaneous goods inflation climbed to 4.8% in February, up from 4.4% in January.
• Personal care inflation jumped to 13.6%, compared to 10.6% in the previous month, primarily due to rising gold prices and rupee depreciation.

“The moderation in food has been partly offset by much higher monthly momentum in core inflation—the highest in the last seven months! Personal Care and Effects has been the main driver, reflecting the gold price effect, which received a double boost from INR depreciation,” said Madhavi Arora, Chief Economist at Emkay Global.

RBI Likely to Cut Rates Again in April Amid Benign Inflation Outlook

With inflation trending below the RBI’s 4% target, analysts believe the central bank has room for additional monetary easing.

• The MPC delivered its first rate cut in February 2025, reducing the repo rate from 6.5% to 6.25%.
• Economists anticipate another 25 basis points (bps) cut in April, which could be followed by an additional cut in June or August, depending on Q4 FY25 GDP growth figures.
• The RBI expects inflation to remain muted, with its FY26 inflation projection at 4.2%.

“The February CPI inflation print falling well below 4% has cemented expectations of a back-to-back 25 bps rate cut in April 2025. Another 25 bps cut could follow in June or August, depending on the Q4 FY25 GDP growth figures,” said Aditi Nayar, Chief Economist at ICRA.

Liquidity Concerns May Delay Rate Transmission

Despite easing inflation, economists do not foresee aggressive rate cuts beyond April, as tight liquidity conditions in the banking system may slow the transmission of policy rate reductions to bank deposit and lending rates.

• A recent poll conducted before India’s GDP data release in February suggested that the RBI may only cut rates once more after April, with FY26 ending with a repo rate of 5.75%.
• “We are apprehensive that tight liquidity conditions may delay the transmission of policy rate cuts to bank deposit and lending rates,” Nayar added.

With inflation cooling, all eyes are now on the RBI’s April policy meeting, where another rate cut appears increasingly likely, reinforcing expectations of a pro-growth monetary policy stance.