India's retail inflation dropped to its lowest level in over five years, driven by a continued decline in food prices. This development could give the central bank more flexibility to implement further interest rate cuts, especially as concerns grow that the US-China trade war could dampen global economic growth.
According to government data, annual retail inflation fell to 3.34% in March, coming in below the 3.60% forecast by economists. This marks the lowest inflation rate since August 2019, down from 3.61% recorded in February.
“Retail inflation is getting a repeated breather from a softer food inflation,” amid forecasts of better farm output, according to Dipanwita Mazumdar, a Bank of Baroda economist.
The primary factor behind the recent decline in inflation has been a significant drop in food prices, which had remained at exceptionally high levels for much of last year, Reuters reports
In March, food inflation moderated to 2.69%, down from 3.75% in February, marking the lowest level since November 2021.
Notably, vegetable prices saw a sharp year-on-year decline of 7.04%, reversing the 1.07% rise recorded the previous month.
Last week, the Reserve Bank of India (RBI) cut its key policy rate for the second time in a row, indicating the possibility of further reductions ahead to stimulate domestic demand. Alongside the rate cut, the RBI adopted a more accommodative monetary policy stance and revised its GDP growth projection for the current fiscal year down to 6.5% from 6.7%.
Despite the easing trend in inflation, the central bank cautioned that global market volatility and potential weather-related supply disruptions remain risks that could push inflation higher. The RBI projected retail inflation at 4% for the fiscal year, based on the assumption of a normal monsoon.
“Based on domestic factors alone we see space for another two rate cuts minimum in remainder of 2025,” said Gaura Sen Gupta, economist at IDFC First Bank.
“We don't rule out the possibility of a third rate cut, if global growth conditions weaken further.”
The Reserve Bank of India's monetary policy committee is scheduled to meet again in June, just before the new July deadline for the United States to potentially lift its pause on reciprocal tariffs.
Furthermore, India is anticipating above-average monsoon rainfall in 2025, boosting hopes for stronger agricultural output and overall economic growth.
Cereal prices saw a rise of 5.93% in March, slightly lower than the 6.1% increase recorded in February. Meanwhile, pulse prices declined by 2.73%, a sharper drop compared to the 0.35% decrease seen in the previous month.
Core inflation, which excludes volatile components like food and energy and is considered a more accurate indicator of underlying domestic demand, edged up to 4.1% in March, compared to the 3.9% to 4% range recorded in February, according to two economists.