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Headline inflation for February moderated to a seven-month low of 3.61% YoY, primarily due to easing food prices (-2% MoM), especially for vegetables, eggs, and pulses. Core inflation ticked up further, however, to a 16-month high of 4.2% YoY, mainly owing to higher gold prices. March CPI is tracking ~3.8% so far with food prices staying largely subdued. Core inflation is expected at ~3.6% in FY25E but is likely to be over 4% for the coming months, while we see FY25E headline inflation at ~4.7%. For FY26E, headline inflation is estimated at 4.3-4.4% (core: ~4.2%). A significant undershoot (40-50bps) in CPI for Q4FY25 will keep an April rate cut in play. However, global dynamics remain volatile, with their effect on FX to be watched.

Headline CPI at seven-month low, driven by lower vegetable prices

Headline CPI inflation fell to a seven-month low of 3.61% YoY in February (Consensus: 3.98%; Emkay: 4.02%, prior: 4.26%), primarily driven by continued sequential easing in food prices. Sequentially, CPI declined for the fourth consecutive month (-0.5% MoM vs -1% prior), as food inflation dropped 2% MoM (vs -3% prior). Within food, vegetable prices continued their descent (-11% MoM vs -15% prior) on improved supply and, in fact, moved into deflation on a YoY basis (-1% YoY), driving most of the decline in food and headline inflation. Prices for eggs (-5.3% MoM), pulses (-3.6% MoM), and spices (- 0.8% MoM) also fell sequentially. On the other hand, fruits (2.1% MoM) and sugar (1.3% MoM) saw significant price increase.

Core inflation rises sharply amid higher gold prices

In contrast, core inflation rose to a 16-month high (4.2% YoY vs 3.7% prior). Monthly momentum picked up significantly to 0.7% MoM; the highest in nearly three years. The increase was led by personal care and effects (2.8% MoM vs 1.1% prior), mainly due to sharply higher gold prices (~8% MoM) during the month. All other categories remained below 0.4% MoM, other than housing (0.6% MoM). Core inflation is likely to stay above 4% going ahead.

FY25E headline CPI at ~4.7%; FY26E at ~4.3-4.4%

We are currently tracking March headline inflation at ~3.8%, with prices for cereals and pulses easing, whereas those for vegetables, fruits, and edible oils being largely flat so far. Q4FY25 headline inflation is currently averaging 3.9% after the February print and is therefore likely to undershoot the RBI’s forecast (4.4%) by 40-50bps. We now see FY25E headline inflation at ~4.7% (FY24: 5.4%), slightly lower than the RBI’s forecast (4.8%), with core inflation at ~3.6%. For FY26E, we see headline inflation dipping to 4.3-4.4%, assuming normal monsoons (RBI: 4.2%) with core inflation rising to ~4.2%.

IIP growth for January rises as manufacturing growth improves

IIP growth improved to 5% YoY in January (Dec: 3.5% YoY), with all categories seeing healthy growth. Manufacturing (5.5% YoY) and mining (4.4% YoY) saw growth improving, whereas electricity growth (2.4% YoY) was lower. According to use-based classification, all categories except consumer non-durables registered positive growth.

April rate cut in play, but watch for volatile global dynamics

The RBI had commenced its rate-easing cycle with a 25bps cut in February, and a (likely) inflation undershoot of 40-50bps in Q4FY25 will keep an April rate cut in play, as also reflected in the dovish tone of the February meeting minutes. However, we will continue to keep tabs on fluid global dynamics and their knock-on effects on FX. So far, subdued global oil prices have tempered the pass-through effect of a weaker INR. Additionally, changing and volatile global growth and tariff narratives may allow EM central banks to be more tolerant of weaker FX, giving them the space to ease rates.

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