India's inflation rate in November significantly declined, further heating up market expectations for a rate cut by the Reserve Bank of India. According to the latest data, the overall inflation rate in India fell from 6.21% in October to 5.48%, marking a 14-month low and below economists' expectation of 5.53%. This data comes amidst a slowdown in India's economic growth, where easing inflationary pressures could allow for adjustments in monetary policy.
Inflation decline driven by falling food prices
The decline in the inflation rate is attributed to the seasonal drop in food prices and the arrival of the autumn harvest. Previously, the Reserve Bank of India (RBI) had warned that adverse weather conditions and rising international agricultural prices could boost food prices. However, recent favorable weather conditions and increased supply have eased food inflation pressures.
The slowdown in India's economic growth further strengthens market expectations for a more accommodative monetary policy. As of the second fiscal quarter ending in September, India's GDP growth was only 5.4%, hitting almost a two-year low and falling far short of market expectations. Nevertheless, despite the weak economic growth, the Reserve Bank of India maintained the benchmark rate at 6.5% during its December monetary policy meeting.
Central bank rate cut expectations rise
The Reserve Bank of India anticipates the overall inflation rate to reach 5.7% for the third fiscal quarter ending in December and forecasts the inflation rate for the fiscal year 2025 at 4.8%. However, with the decline in food prices, inflation may ease further in the fourth quarter. Good soil moisture and favorable reservoir levels also provide conducive conditions for winter crop production.
Market analysts suggest that the decline in inflation and the slowdown in economic growth could prompt the Reserve Bank of India to adjust its policy stance in the coming months. The probability of a rate cut has increased, which could not only alleviate downward economic pressures but also offer greater support to businesses and consumers.
The critical impact of food prices on inflation
Food price inflation holds significant importance in India's inflation data, with agriculture being a vital component of the country's GDP. The Consumer Food Price Index (CFPI) is a crucial measure of changes in food prices, and its decline further supports the overall fall in the inflation rate.
Additionally, falling vegetable prices and an ample grain supply have provided short-term improvements to the inflation data. Nonetheless, the Reserve Bank of India must remain vigilant about global market fluctuations and adverse weather that could impact food prices.
Conclusion
The decline in inflation provides the Reserve Bank of India with greater room for policy adjustments. With the slowdown in economic growth and easing food prices, market expectations for future rate cuts are rising. The central bank's policy direction will become a crucial factor affecting market and economic development, while also offering the potential for further improvements in inflation data.
