Reuters

The fall in retail inflation for the month of December has brightened rate cut hopes in the February monetary policy review. Annual retail inflation in December eased to 5.22% from 5.48% in the previous month, lower than economists’ estimate of 5.3% in a Reuters poll.

“Fall in headline inflation boosts February rate cut odds,” said Harry Chambers, economist at Capital Economics. “We are forecasting a 25 basis points cut to the repo rate, to 6.25%,” Chambers said.

Inflation in food items, which account for nearly half of the consumption basket, slowed to 8.39% in December from 9.04% a month earlier.

Prices of cereals rose by 6.5% from a 6.88% increase in November, while those of pulses rose 3.83% compared to a 5.41% growth in the same period.

Meanwhile, vegetable prices continued to rise at a solid pace, despite some continued moderation. They rose 26.56% year-on-year in December, compared to a 29.33% increase registered in November and 42.18% in October.

Core inflation, which excludes volatile items such as food and energy prices and is seen as a better gauge of domestic demand, was 3.6% in December compared to between 3.64% and 3.7% in November, according to two economists.

“Today’s inflation shows a steady reversal in food price pressures which is a welcome development, but the recent pressure on the rupee adds a new dimension (to inflation risks),” said Rahul Bajoria, an economist at Bank of America.

The rupee fell to a record low on Monday, with a stronger dollar and outflows from local equity markets weighing on the local unit.

A weaker currency can feed inflation by raising the cost of imported goods. Uncertainty around global trade after several warnings by U.S. President-elect Donald Trump on tariff hikes also pose a risk to inflation in the months ahead.

COUNTERING THE SLOWDOWN

The slowing inflation is likely to pile up pressure on the Reserve Bank of India (RBI) to cut rates in February, with India’s growth projected to slow to a four-year low of 6.4% in the financial year ending March 31.

The Indian government in its last monthly economic report said the RBI’s monetary policy stance was partly responsible for a demand slowdown.

The Monetary Policy Committee’s (MPC) February review would be the first under new RBI Governor Sanjay Malhotra, who recently said the central bank would strive to support a higher growth path.

Still, not all economists believe a February rate cut is likely.

With headline inflation “stubbornly” above 5%, the probability of a rate cut in February has “receded,” said Aditi Nayar, chief economist at rating agency ICRA.

“However, the considerable decline in vegetable prices that is underway could convince some MPC members to consider an early cut in the upcoming meeting, with a view to supporting growth,” Nayar said.