India’s CPI inflation moderated to 5.22% YoY in Dec-24 from 5.48% in Nov-24. The deceleration in the headline inflation print is broadly in line with market consensus expectation of approximately 5.3%.

Key highlights of Dec’2024

• On a sequential basis, CPI fell by 0.56% MoM. This is lower than the series median sequential contraction of 0.45% in the headline index associated with the month of December. 
• Annualized food inflation moderated to a 3-month low of 7.7% in Dec-24. This was on account of the sequential easing of price pressures. 
  1. Prices recorded a decline in the case of Vegetables (-7.3% MoM), Pulses (-0.97% MoM), Fruits (-0.8% MoM), Meat and fish (-0.6% MoM), Sugar and confectionery (-0.1% MoM), and Spices (-0.3% MoM).
  2. There was, however, a partial offsetting impact from Oils and fats (3.0% MoM), Eggs (2.7% MoM), and Cereals (0.8% MoM). 
• Consolidated fuel inflation remained in negative territory for the sixteenth consecutive month. However, the annualised print inched up from -1.9% in Nov-24 to -1.5% in Dec-24, accompanied by a strong sequential increase in PDS Kerosene (10.2% MoM), Firewood and chips (0.7% MoM), Coal (0.7% MoM), LPG (0.6% MoM), and Dung cake (0.6% MoM).
• Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) moderated a tad to 3.9% YoY in Dec-24 from 4.0% in Nov-24. While sequentially, the core index saw a minor fall of 0.05% MoM; we note that it marks the first instance of month-over-month price correction in 42 months.

Near Term Inflation Outlook

The moderation in food inflation in Dec-24 is comforting. Some of the food items that registered double-digit declines in prices on a sequential basis in Dec-24 were Cauliflower, Radish, Tomato, Spinach, Cabbage, Ginger, Onion, Peas, Green chilli, Water chestnut, and Carrot.

Further, daily mandi prices for TOP (Tomato, Onion, and Potato) vegetables, which have a cumulative weight of 2.2% in the CPI basket, show encouraging signals for Jan-25, with prices dropping by ~16% (compared to ~10% in Dec-24) on weighted average basis in the first twelve days. If this trend persists, then it could play a key role in pushing down headline CPI inflation to under 5% levels in Jan-25.

Having said, concerns over the slower inflation descent continue to linger:

• While incremental price pressures in the case of edible oils (reflecting the impact of custom duty hikes) have started to taper, the magnitude still remains large (edible oils index jumped by 1.1% MoM in Dec-24 compared to an average of 4.0% MoM seen in the previous three months).
• The recent sharp pace of rupee depreciation has taken the market participants by surprise. INR took just a little over 3 months to weaken by 3.5% (as of date) – in comparison, a similar magnitude of weakness was last seen over a period of 25 months. The inflationary impact of currency depreciation (as per the RBI, a 5% weakness in the rupee adds about 35 bps of upside to headline inflation) is an active risk on the table and needs to be assessed in conjunction with the expected disruption to global trade under the likelihood of US president-elect Trump pressing tariffs on most of the countries in 2025.
• Last but not least, crude oil prices have once again come under pressure (Brent is approaching its highest levels in 6 months) due to the imposition of renewed sanctions on Russian oil exports by the US. This could not just be inflationary for India, but it would also widen the trade deficit, thereby exacerbating the pressure on INR. 

Although the CPI basket has a much larger share of non-tradable compared to the WPI basket and is, therefore, less vulnerable to price shocks from global commodities and cost disruptions in international trade, the lagged spillover impact remains a possibility.

Meanwhile, we are hopeful that the arrival of kharif produce, healthy water reservoir levels, and satisfactory progress of rabi sowing should further help in dousing food price pressures over the next 3 months.

Overall, we now foresee a minor upside of 20 bps to our FY25 CPI inflation estimate of 4.7%. From a monetary policy perspective, upward revisions to the near-term inflation trajectory, along with the emergence of currency risk amidst a fragile backdrop for global financial markets, are going to pose challenges to the MPC. We believe the MPC would retain its focus on monetary policy independence to navigate through the current phase of trilemma facing the RBI. As such, we push out our expectation for the first rate cut to Apr-25 from Feb-25 earlier.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research, “It’s has been a modest relief in the inflation print in Dec’2025 with CPI coming off slightly by around 30 bps albeit still above 5%. Food inflation has dropped from 9.0% but still stuck at around 8.4%. The decline was expectedly, driven by the seasonal slide in vegetable prices. Monthly retail mandi prices for key vegetables (Tomato, Onions, Potatoes) have seen a sequential decline from their peaks in Sept-Oct’24, averaging about 9% lower in December compared to November. However, prices of potatoes remain higher by around 68% YoY, and vegetable inflation still stands at 26.6% in Dec’24 despite the downslide. Further, edible oil prices rose 14.6% YoY in Dec’24.

Q3 FY25 average inflation came in at 5.6%, close to RBI’s call of 5.7%. In the months ahead, food inflation is expected to continue its downward trajectory, driven by the seasonal decline in vegetable and other food prices supported by a good Rabi season. But there is still an uncertainty on the extent of the decline in food inflation over the next few months. While we have also forecast average Q4FY25 inflation at 4.5% in line with that of RBI, we see some upside risks given the sudden rise in oil prices and the imported inflation pressures.

Given that the latest headline print is higher than 5% amidst a fairly sharp depreciation in the INR, we see increased risks to the expectation of a cut in interest rates in Feb’2025 MPC meeting and have postponed the cut expectations in Q1FY25 in our base scenario.”

Table: Overview of key sub-components of inflation 

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI

Chart 1: After facing continued pressure for 7-8 months, staple vegetable prices are now aligning with the historical trend

Chart 2: Four consecutive months of rather sharp depreciation in INR is reminiscent of the impact seen after the start of the Russia-Ukraine war