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Feb-25 Inflation: Treading below 4%

17 Mar 2025

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KEY TAKEAWAYS 

  1. India’s CPI inflation slipped to new post COVID low, with the Feb-25 print coming in at 3.61% YoY, down from 4.26% in Jan-25.
  2. Annualized food inflation retreated sharply to an 11-month low of 3.8%, led by incremental softening of prices for vegetables, eggs, pulses, etc.
  3. Consolidated fuel inflation remained in negative territory for the eighteenth consecutive month, printing at -1.4% YoY.
  4. Core CPI inflation inched up to a 16-month high of 4.3% YoY due to higher price of jewellery items that reflect the sharp increase in international price of precious metals along with the recent weakness in the rupee.
  5. Although high frequency indicators for Mar-25 suggest a fading of price correction in key vegetable items, it would keep the headline inflation close to the 4% target in Mar-25.
  6. As such, we keep our estimate for average CPI inflation in FY25 to 4.8%.
  7. While the disinflationary impact of food prices could persist in FY26 (assuming a normal monsoon outturn), higher than normal temperature levels in the near term and INR depreciation would provide an upside. 
  8. On a net basis, we expect CPI inflation to average at 5.0% in FY26.
  9. We believe the MPC will opt for an additional 25 bps rate cut in the next policy review in Apr-25.


India’s CPI inflation slipped to its lowest level post-COVID, with the Feb-25 print coming in at 3.61% YoY, down from 4.26% in Jan-25. While market participants expected inflation to show a deceleration towards 4.0% (consensus expectation), the actual print posted a considerable downward surprise.


Key highlights of Feb-25 data

  • On sequential basis, CPI posted a decline of 0.4% MoM, sharply lower vis-à-vis the median increase of 0.17% associated with the month of February. In fact, Jan-25 recorded the sharpest correction in the headline index compared to any of the other January months in the series beginning 2011. 
  • Annualized food inflation retreated sharply to an 11-month low of 3.8% in Feb-25 from 5.6% in Jan-25. 
    1. Sequentially, food prices fell by 1.6% MoM, with major price correction seen in Vegetables (-11.2% MoM), Eggs (-5.3% MoM), and Pulses (-3.6% MoM). 
    2. At an item-wise level, some of the steepest price correction was seen in the case of Peas, Garlic, Tomato, Potato, Cauliflower, Cabbage, Carrot, Grapes, Brinjal, and Beans – all these food items recorded a double-digit sequential drop in prices during Feb-25.
  • Consolidated fuel inflation remained in negative territory for the eighteenth consecutive month, printing at -1.4% YoY in Feb-25. Notably, the disinflationary impulse in the consolidated fuel inflation is dissipating gradually (despite persisting in the negative territory, the Feb-25 print stood at a 12-month high) and is estimated to fall off in the next month’s print.
  • Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) inched up to a 16-month high of 4.3% YoY in Feb-25 from 3.9% in Jan-25, primarily due to higher price of jewellery items that reflect the sharp increase in the international price of precious metals along with the recent weakness in the rupee.


Inference and Outlook

In our previous report, we had indicated the possibility of a strong disinflationary impulse within food to pull down headline CPI inflation below the 4% target in Feb-25. However, the extent of deviation is surprising - this underscores the massive two-sided variations seen in food inflation, which is often the primary cause of volatility in headline CPI inflation.

 

With substantial sequential price correction in food items in recent months, the benign trajectory for food inflation could prevail in the near term.


  • Signals from daily mandi prices suggest that key vegetable prices have further softened in Mar-25, albeit by a much lesser degree. In fact, they are now showing signs of bottoming out. For e.g., although TOP (Tomato, Onion, and Potato) prices are tracking a decline of 1-7% on a monthly average basis in Mar-25 so far, on a daily basis, they are up by 3-10% from their respective lows in Feb-25. 


This implies that the headline CPI inflation could remain below the 4% target in Mar-25. Even so, we keep our estimate of average CPI inflation in FY25 at 4.8%.

 

On the assumption of a normal monsoon, we expect the disinflationary impact of food prices to persist on an average basis in FY26. Having said that, the immediate situation does not offer comfort. While it is still early to draw any conclusion on the outlook for the south-west monsoon season (the IMD will provide its preliminary forecast in Apr-25), the IMD expects early onset of summer, with Mar-25 likely to record above normal temperatures with likelihood of heatwaves in select places. As per the IMD this could potentially pose some “heat stress” with conditions not likely to be conducive for “wheat, chickpea, and rapeseed”.

 

In addition, CPI inflation in FY26 will also experience the lagged impact of rupee depreciation. As per the standard statistical thumb rule, a 5% depreciation in the INR vs. the USD leads to 35 bps increase in CPI inflation, ceteris paribus.

 

As such, on a net basis, we project average CPI inflation in FY26 at 4.3%. With the expectation of near alignment with the target, we believe the MPC will opt for an additional 25 bps rate cut in the next policy review in Apr-25, taking the cumulative rate easing to 50 bps. The MPC is likely to pause thereafter and assess the volatile geoeconomic situation, rupee volatility and weather conditions before deciding on its next move.

 

Below is Acuité Ratings & Research Limited's comprehensive comment on the Feb 2025 inflation:

 

“India’s retail inflation came down to 3.61% in Feb’25 from 4.26% in Jan—below the 4% target for the first time in six months - signalling a shift from base-effect-driven moderation to genuine price cooling. The sharp correction in vegetable prices, with inflation plunging from 11.4% in January to a decline of 1.0% in February, aided by fresh winter arrivals posting a fourth consecutive month of sequential price drops. The data also showed declines in pulses and spices, which together constitute most of the Indian thalis; however, one of the main ingredients, onion prices, posted a 30.4% increase in inflation.

 

While food disinflation is evident, price pressures persist in some categories, such as fruits (14.8%) and oils & fats (16.3%), which continue to post double-digit inflation. Cereals showed a modest increase, with the rising wheat prices hinting at lingering supply-side constraints. We believe the pockets of heatwaves and unseasonal rains could make matters worse as soon as the Kharif harvest depletes.

 

Core inflation remained largely contained, rising modestly to 3.9% from 3.7% in the previous month, while global oil prices have been trending lower. This combination strengthens the case for another 25-bps rate cut in the RBI’s April MPC as it eyes growth.”



Table1: Overview of key sub-components of inflation




Chart 1: After facing continued pressure during the summer and autumn months, staple vegetable prices are now undershooting the historical trend




Chart 2: Rupee weakness poses a risk to core inflation