Quote on CPI inflation by Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India
Below the Quote on CPI inflation by Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India
"The just-released CPI inflation (YoY) print for February came as a bit of a surprise, and will be welcomed by the bond markets. CPI cooled off further to a 9 month-low of 3.6% in February 2025. Month-on-month CPI fell by 52 bps in February. This was the fourth consecutive drop registered by CPI. Core CPI however rose to 4.0% (from previous month’s 3.7%), but is still at the RBI’s median 4% target level.
A moderation in food prices has been the primary driver of the fall in CPI. After peaking out in October 2024 at 9.69% (YoY), Food & Beverages CPI has been dropping sequentially. February F&B inflation came in at 3.84% YoY, which is a significant drop, and also much below CY24’s average level of 7.6%. Month-on-month, F&B inflation contracted 1.64% in February, after already falling 2.43% in January. A significant drop in vegetable prices was the primary reason for the moderation in F&B inflation. This is the lowest level of F&B inflation in 21 months.
The sharp drop in CPI is certainly a welcome development, as it provides more leg room to the RBI MPC in monetary easing. RBI has pivoted in the February MPC meeting with a 25 bps rate cut and is now looking to revive growth of the Indian economy. In the backdrop of tight monetary policy and high interest rates over the past couple of years as well as the prevailing global (geopolitical and trade) uncertainties, India’s GDP growth had collapsed from 9.5% a year back (Q3FY24, YoY) to 5.6% in Q2FY25, before recovering slightly to 6.2% in Q3FY25. RBI’s own projection for the GDP in FY25 and FY26 is around 6.6-6.7%, which is much lower than the 9.2% annual growth that the economy registered in FY24.
The Index of Industrial Production (IIP) has also been exhibiting weakness. IIP growth had moderated to 3.2% YoY in December, after an uptick to 5.0% in November, with manufacturing IIP falling to 3% YoY in December from 5.5% YoY in November. Thankfully, IIP rebounded strongly in January 2025 to 5.0% YoY; manufacturing IIP also recovered back to 5.5% YoY.
It was reassuring to see some flexibility being adopted by the MPC in the February monetary policy by making its rate decision ‘forward-looking’ rather than waiting to achieve the intended 4% headline CPI level. The banking system liquidity has been tight since December, and RBI, under the new Governor, has resorted to multiple tools (VRR auctions, OMO auctions, Fx swaps) to infuse near-term and durable liquidity into the money market and debt market.
With a more benign inflation environment (CPI now below RBI’s 4% target), and especially after the comforting January inflation print, we can expect a follow-though 25 bps rate cut in April policy. However, we expect the rate cut cycle in India to be shallow (total 50-75 bps), as the Indian economy continues to be on a relatively strong footing."
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