India’s Inflation Rate Drops to 3.61% in February, Below RBI Target

India’s inflation rate fell to a cooler-than-expected 3.61% in February, dipping below the Reserve Bank of India’s (RBI) 4% target for the first time since mid-2024. The decline, driven largely by easing vegetable prices, signals potential room for further monetary policy adjustments.

Lower Inflation Than Expected

The latest data from the Ministry of Statistics and Programme Implementation shows that February’s inflation rate was significantly lower than the 3.98% forecasted by economists polled by Reuters. This marks the lowest inflation rate since July 2024, offering some relief amid concerns over price volatility in the world’s fifth-largest economy.

Food Prices See a Decline

A key factor in the overall dip was the cooling of food inflation, which stood at 3.75% in February. Vegetable prices, which had surged by 11.35% in January, dropped by 1.07% on a year-on-year basis. Additionally, prices for pulses contracted by 0.35%, reversing the 2.59% hike recorded in January. However, cereal prices remained relatively stable, easing slightly to 6.1% from 6.24% the previous month.

Analysts from Bank of America noted that vegetable prices have been falling sharply since October, especially for potatoes and tomatoes, due to improved supplies. However, they cautioned that this downward trend may reverse as early as March, citing potential heatwaves and weather-related disruptions to crops.

Impact on Monetary Policy

The dip in inflation comes at a time when India’s economic growth is slowing. The country’s GDP expanded by 6.2% in the fourth quarter, falling short of expectations. For the financial year ending March 2025, the economy is projected to grow by 6.5%, a noticeable slowdown from 9.2% the previous year.

Given these conditions, the RBI may have more room to pursue interest rate cuts. In February, the central bank trimmed the repo rate by 25 basis points to 6.25%, marking its first rate cut in nearly five years. Analysts anticipate further reductions, with 100 basis points worth of cuts expected by the end of 2025. This would bring the repo rate down to 5.50%, aligning with the RBI’s neutral rate target.

Global Economic Headwinds

Despite the cooling inflation, the RBI’s Monetary Policy Committee (MPC) remains cautious about broader economic risks. Global markets are grappling with challenges such as tariff wars, geopolitical tensions, and currency volatility. The RBI noted in its February meeting minutes that these uncertainties continue to pressure emerging markets, including India.

However, Bank of America analysts believe that India’s monetary policy has now shifted toward supporting growth, as inflation projections remain in line with the RBI’s 4% target in the medium term.

Looking Ahead

With inflation cooling and economic growth slowing, all eyes are now on the RBI’s future policy decisions. While interest rate cuts could stimulate economic activity, external risks and potential weather disruptions may still impact price stability in the coming months.