India’s retail inflation dropped to a seven-month low of 3.61% in February 2025, down from 4.31% in January, as food price pressures softened, according to government data released on Wednesday. This marks the first time since August 2024 that inflation has fallen below the Reserve Bank of India’s (RBI) medium-term target of 4%. The Consumer Price Index (CPI) inflation remains well within the RBI’s 2-6% tolerance band, providing relief to consumers and policymakers alike.

Breakdown of Inflation Data

• Overall Retail Inflation: 3.61% (February 2025) vs. 4.31% (January 2025)
• Rural Inflation: 3.79% (down from 4.59% in January)
• Urban Inflation: 3.32% (down from 3.87% in January)
• Rural Food Inflation: 4.06%
• Urban Food Inflation: 3.20%

The easing of food price inflation played a key role in the overall decline, helping to reduce consumer cost pressures. The drop comes as a relief for households, especially ahead of the summer season, when food prices typically fluctuate.

Industrial Output Growth

While inflation cooled, India’s industrial output, measured by the Index of Industrial Production (IIP), saw a robust 5% year-on-year growth in January 2025, compared to 3.2% in December 2024. The manufacturing and mining sectors were the primary contributors:

• Mining Output: Up 4.4%
• Manufacturing Growth: Expanded by 5.5%
• Electricity Generation: Increased by 2.4%

The industrial sector’s steady growth reflects strong domestic demand and improving production efficiency, despite global economic uncertainties.

Implications for RBI Policy

The RBI had projected CPI inflation for FY25 at 4.8%, with Q4 FY25 estimated at 4.4%. The lower-than-expected inflation figure in February—below even the 3.98% estimate from a Reuters poll of 45 economists—could influence the central bank’s next policy move.

In its recent policy decision, the RBI cut the repo rate by 25 basis points to 6.25% to support growth. With inflation dipping below 4%, analysts believe the RBI might consider further monetary easing in its April 2025 policy meeting. However, key factors influencing the decision will be:

• Global Crude Prices: Any surge in oil prices could push inflation higher.
• Geopolitical Risks: Global uncertainties, especially in energy markets, may impact inflation trends.
• Core Inflation Trends: The RBI will closely monitor core inflation, excluding food and fuel, to assess underlying price pressures.

Market Reactions & Future Outlook

The lower-than-expected inflation rate has boosted investor sentiment, as it increases the likelihood of RBI rate cuts that can stimulate borrowing and investment. With strong industrial growth and cooling inflation, India’s economic outlook for 2025 remains positive. However, external factors such as commodity price volatility and global economic conditions will play a crucial role in shaping future trends.

The upcoming RBI policy decision in April 2025 will be closely watched, as markets anticipate further signals on interest rates and economic growth strategies.

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