India’s CPI inflation decelerated sharply to a 5-month low of 4.31% YoY in Jan-25 from 5.22% in Dec-24. While market participants expected inflation to show a marked deceleration towards 4.5-4.6% (consensus expectation), the actual print posted a mild downward surprise.

Key Highlights 

• On a sequential basis, CPI posted a decline of 0.97% MoM, sharply lower vis-à-vis the median decline of 0.11% associated with the month of January. 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 a 5-month low of 5.6% in Jan-25 from 7.6% in Dec-24. 
  1. Sequentially, food prices fell by 2.4% MoM, recording their steepest decline in 49 months. Price correction in Jan-25 was led by Vegetables (-15.6% MoM), Pulses (-2.1% MoM), and Eggs (-1.9% MoM). 
  2. At an item-wise level, some of the steepest price correction was seen in the case of Tomato, Cauliflower, Peas, Cabbage, Onion, Potato, Brinjal, Radish, Spinach, Carrot, and Ginger – all these vegetable items recorded a double-digit sequential drop in prices during Jan-25.
• Consolidated fuel inflation remained in negative territory for the seventeenth consecutive month, printing at -1.5% YoY in Jan-25 (unchanged vs. Dec-24 levels). 
• 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 4.0% YoY in Jan-25 from 3.9% in Dec-24, primarily due to higher price of precious metals.

Inference and Outlook

While the sequential decline in food prices on the back of favourable winter seasonality started in Nov-24, it was underwhelming to begin with. However, the seasonal correction in food prices has now gathered strong momentum – in fact, the 2.43% MoM fall in the food and beverages index in Jan-25 is not just way beyond the median price correction of 0.58% MoM associated with the month of January, but it is also the sharpest correction in the food and beverages index compared to any of the other January months in the series beginning 2011.

Signals from daily mandi prices suggest that key vegetable prices have further softened in Feb-25, albeit by a lesser degree. In fact, they are now showing signs of bottoming out. For example, TOP (Tomato, Onion, and Potato) prices are tracking a decline of 9-23% on a monthly average basis in Feb-25 so far. The near-term impact of this is likely to manifest in further moderation in food and beverages inflation, which in turn could push headline CPI inflation to under 4% levels in Feb-25 and Mar-25. Taking this possibility into account, we retain our estimate for average CPI inflation in FY25 to 4.8%.

Going forward, the assumption of a normal monsoon, and more importantly, minimal weather-related disruptions, would provide a salubrious backdrop for food prices, which have been subjected to a variety of weather shocks over the last two years. We expect the disinflationary impact of food prices to persist on an average basis in FY26 – with the food and beverages index having a weight of 45.9% in the CPI, this should help in moderating headline inflation from our estimate of 4.8% in FY25 to close to 4.0% levels in FY26.

On the other hand, the rapid depreciation of the rupee has weakened the rupee by about 3.5% since October. The sharp decline will eventually have an inflationary impact; as per RBI estimates, a 5% rupee depreciation adds around 35 bps to headline inflation. Compounding this risk, India faces potential US tariff hikes under a Trump presidency due to its higher import duties despite recent reductions in tariffs on key goods. With a $45.7 billion trade surplus and hefty 39% duties on U.S. agricultural imports, India may need to make concessions to avoid retaliatory measures.

Additionally, crude oil prices pose an additional risk, with geopolitical tensions affecting supply.

We believe the Reserve Bank of India will take comfort in the sustained disinflation trend and gradually continue its easing towards a more accommodative stance to support economic growth. With inflationary pressures moderating and core inflation remaining contained, the central bank is likely to be more data-dependent in its coming meetings. We expect the RBI to deliver another 25-bps rate cut in its next meeting in Apr-25. Our estimates for headline inflation stand at 4.8% for FY25 and 5.0% for FY26, reflecting a relatively benign inflation scenario. While upside risks remain, particularly from food price volatility and global commodity trends, we believe the disinflationary trajectory will provide some room for policy easing in the near term.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research, “January’2025 inflation came in at a five-month low which was better than expected, with a sharp seasonal reduction in food inflation. This is clearly driven by the decline in vegetable prices with the arrival of the winter harvest. The steep correction in tomato, onion, and potato prices has contributed to this downward trajectory in food inflation.  Additionally, a decline in pulses inflation, supported by tariff-free imports and strong harvest expectations, has also helped ease the food price pressures. However, the inflation in edible oils is showing an increasing trend and stood at 15.6% in Jan’2025.

Core inflation has shown only a marginal uptick and is not currently a worry for policymakers. Looking ahead, rabi sowing has been as per expectations and vegetable prices have continued to drop further in Feb’25, which should help keep the headline inflation in check for the coming two months. While the disinflation trend is a positive development and has enabled RBI to go for the rate cut, the rise in prices of edible oils along with other imported goods which has been hit by the significant rupee depreciation, along with the potential global trade war, will be monitorables.”

 Table1: 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 during the summer and autumn months, staple vegetable prices are now undershooting the historical trend

Chart 2: Vegetable price pressures lessen while Oils and Fats saw increased inflation since October 24

Chart 3: Rupee weakness poses a risk to core inflation