India’s retail inflation dipped to a five-month low of 4.31% in January, down from 5.22% in December. While this decline has sparked optimism among policymakers and market watchers, it is premature to celebrate. The moderation in inflation is largely driven by seasonal factors, especially within the food segment, which masks underlying vulnerabilities in price stability.
The most significant contributor to the decline is food inflation, which eased to 6% in January from over 8% in the preceding months. This sharp fall can be attributed to the cyclical nature of food prices, particularly the winter harvest’s impact on vegetable and cereal supplies. Vegetable inflation dropped dramatically to 11.4% from 26.6%, and cereal inflation eased to 6.24% from 6.5%. Pulses also saw a decline, with inflation reducing to 2.59% from 3.83%. However, these trends are typical during this period and do not reflect structural improvements in the supply chain or agricultural productivity.
Moreover, while certain food categories have seen relief, others paint a worrying picture. Fruits inflation surged to a near five-year high of 12.2%, and oil inflation reached a three-year high at 15.6%. These figures highlight persistent price pressures in essential commodities, suggesting that the overall inflation environment remains fragile.
Core inflation, which excludes volatile food and fuel prices, remains sticky. The inflation in miscellaneous products, a key component of core inflation, rose to 4.35% from 4.19% in December. This indicates that non-food, non-fuel inflationary pressures continue to simmer beneath the surface, driven by factors such as service costs, healthcare, and education expenses.
The Reserve Bank of India (RBI) has projected inflation to average 4.4% in the current quarter, with expectations of it easing to 4% by the second quarter of FY25 and 3.8% in the third quarter. However, historical data suggests that inflation rarely stays anchored around the RBI’s 4% target. Since the Monetary Policy Committee (MPC) was established in 2016, inflation has hovered near the target for only 13 out of 102 months and never for more than two consecutive months.
Additionally, the recent rate cut by the RBI—the first in five years—might fuel demand-side pressures, potentially reversing the gains if supply-side constraints are not addressed effectively. The combination of global commodity price fluctuations, unpredictable monsoon patterns, and supply chain disruptions could easily reignite inflationary pressures.
In conclusion, while the decline in January’s inflation offers a momentary reprieve, it is essential to view these numbers with caution. Seasonal trends have played a significant role in the moderation, and without addressing structural issues, the current relief may prove short-lived. Policymakers must remain vigilant and focus on long-term strategies to ensure sustained price stability.