India’s inflation eases to 4.31% in January, raises hope for rate cut

Barclays projected that Q4 CPI inflation could average 3.8%, significantly below the RBI MPC’s year-on-year estimate of 4.4%. This strengthens expectations for a 25 basis point rate cut in the April policy meeting.

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India’s retail inflation for January 2025 eased significantly to 4.31%, a sharp decline from 5.22% in December. This moderation, largely attributed to a further correction in vegetable prices, has led Barclays to revise its Q4 CPI inflation estimate to an average of 3.8%, notably lower than the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) forecast of 4.4% year-on-year (YoY).

Barclays noted that the entire 91 basis point (bp) decline in headline CPI inflation from December to January was driven by falling vegetable prices. On a month-on-month (MoM) basis, CPI fell by 0.97%, a sharper drop compared to December’s 0.56% decline and the median January decline of 0.13%. With CPI falling for three consecutive months, the downward momentum has outpaced the usual seasonal trend, reinforcing expectations of another 25 bp repo rate cut in the RBI’s April policy meeting.

While overall CPI showed a notable decline, core inflation inched up slightly. Core CPI inflation rose to 3.74% YoY in January from 3.65% in December, with a sequential increase of 0.39% MoM, reversing December’s 0.03% drop. This rise was largely driven by a typical January increase in house rents, as well as a surge in personal care and effects inflation due to rising gold prices and currency depreciation. International gold prices increased by 2.74% MoM, contributing significantly to the 9 bp rise in core inflation. Within core CPI, goods inflation edged up to 3.9% YoY, while services inflation also saw an uptick to 3.58% YoY.

Looking ahead, February’s inflation trajectory remains favorable. Preliminary data indicates a 1.4% decline in food prices, with retail vegetable prices falling by 6%. Based on this trend, Barclays projects February CPI inflation at 3.6% YoY. Factoring in February’s data along with March estimates, Q4 FY25 (January-March) inflation is expected to average 3.8%—a notable 60 bp lower than the MPC’s projection. This divergence strengthens the case for another 25 bp rate cut in April, as highlighted by Barclays’ Regional Economist, Shreya Sodhani.

Garima Kapoor, Economist and Executive Vice President at Elara Securities, echoed similar sentiments. She stated that food price disinflation is expected to persist in February, aligning CPI inflation with the RBI’s Q4 FY25 estimate of 4.4%. With economic growth still sluggish, the MPC has the necessary policy space to continue on its rate-cutting path. Elara Securities maintains its forecast for a cumulative 50 bp rate cut in FY26, with the next 25 bp cut likely in the April MPC meeting.

On February 7, the RBI’s MPC had already announced a 25 bp repo rate cut to 6.25%, maintaining a neutral policy stance. Given the sustained moderation in inflation and weak economic activity, the possibility of further easing in the coming months remains strong, supporting economic recovery efforts.