Food Inflation Cools to 6.02% as Overall CPI Drops to 4.31% in January

India's retail inflation, based on the Consumer Price Index (CPI), eased to 4.31% in January 2025, a five-month low, compared to 5.22% in December. This decline was mainly due to slower food price hikes. A poll had predicted a slightly higher inflation rate of 4.6% for January.

Rural and Urban Inflation Trends

Inflation in rural areas dropped to 4.64% from 5.76% in December, while urban inflation decreased to 3.87% from 4.58% the previous month. This cooling inflation could boost the chances of another rate cut by the Reserve Bank of India (RBI), which recently lowered its key policy rate to 6.25% in February to support economic growth.

Food Inflation Shows Significant Improvement

Food inflation, a major contributor to the overall CPI, eased to 6.02% in January from 8.39% in December. This was the lowest food inflation since August 2024. Vegetable prices, in particular, saw a significant drop, rising by 11.35% year-on-year compared to 26.6% in December. Prices of cereals and pulses also grew at a slower rate, with cereals increasing by 6.24% and pulses by 2.59%.

Economists attribute this decline in food prices to the arrival of fresh winter produce in markets and a good kharif (autumn) harvest, which helped moderate prices. The moderation in vegetable prices, in particular, contributed significantly to easing food inflation.

Economic Relief from Cooling Inflation

The recent inflation drop provides some relief to the government and the RBI, especially with the country’s economy expected to grow at its slowest pace in four years. In an effort to boost consumption, the government also introduced significant income tax cuts in the February 2025 budget.

RBI's Inflation Outlook

The Reserve Bank of India's Monetary Policy Committee (MPC) recently highlighted the decline in inflation, particularly due to the favorable outlook on food prices. The RBI has forecast inflation to ease further in the coming months, with CPI inflation projected at 4.8% for FY 2024-25. For FY 2025-26, the RBI expects inflation to be around 4.2%, with quarterly projections ranging from 3.8% to 4.5%.

Despite the easing inflation, the RBI's mandate is to keep inflation within a 2-6% range. The decline in food inflation is seen as crucial in helping the central bank maintain its inflation target.

Global Uncertainties and Inflation Risks

While inflation has moderated in India, global uncertainties continue to pose risks to price stability. The Economic Survey for FY 2024-25 indicated that food inflation is likely to soften further in the fourth quarter, but concerns about the weakening rupee, volatile inflation, and foreign investment remain.

The RBI's flexible inflation-targeting framework has helped the country manage inflation effectively. RBI Governor Sanjay Malhotra noted that the inflation targeting model has served India well, with inflation averaging lower after its implementation.

India's retail inflation has eased in January 2025, providing much-needed relief to households. The decline in food inflation, particularly in vegetables, played a key role in bringing down the overall inflation rate. However, global economic challenges continue to present risks, making it crucial for India to maintain a balanced approach to managing inflation.