Inflation seen falling below 4% in February for first time in six months; rate cut hopes brighten

India's consumer inflation for February is anticipated to have fallen below the Reserve Bank of India's (RBI) medium-term target of 4.0% for the first time in six months, driven by a moderation in food price increases, according to a Reuters poll released on March 10. The influx of fresh winter produce into markets over recent months has contributed to a consistent slowdown in the price increases of food items, which account for nearly half of the inflation basket.

This development provides a welcome relief from the supply chain disruptions experienced last year when erratic monsoons and severe heat waves caused food prices to surge, often by double digits.

A Reuters poll conducted among 45 economists between March 4 and March 10 projected that inflation, as indicated by the annual change in the consumer price index, dropped to 3.98% in February, down from 4.31% in January.


The forecasts for this data, which is set to be released on March 12 at 1030 GMT, ranged from 3.40% to 4.65%, with nearly 70% of respondents expecting the figure to be at or below the RBI's medium-term target of 4.0%.

Only five economists anticipated that it would surpass January's level.

"We observe a continued decrease in vegetable price increases," stated Gaura Sengupta, chief economist at IDFC First Bank. "Moreover, we are also witnessing a decline in pulse prices as well as cereals, which are typically the most persistent components of food inflation due to their less frequent harvest cycles."

With inflation comfortably situated within the RBI's target range of 2-6%, economists believe that the central bank is likely preparing for another interest rate cut in April to bolster slowing economic growth, following a quarter-point reduction in February.

A separate Reuters poll suggested that this would lead to a brief and modest rate-cutting cycle. However, the India Meteorological Department's alerts regarding the potential for early summer and heatwaves have raised concerns that inflation may rise again once winter supplies begin to deplete.

"We anticipate that the correction in vegetable prices may start to reverse as soon as March, with risks stemming from heatwaves and weather-related disruptions impacting crops," noted Rahul Bajoria, India & ASEAN economist at Bank of America.

Bajoria's team projects headline CPI inflation at 4.8% for this fiscal year but expects a slight decline to 4.1% in the following year, with risks evenly balanced between lower commodity prices and a weaker rupee.

This aligns with forecasts of 4.8% and 4.3% from a Reuters poll conducted the previous month. Core inflation, which excludes the more volatile food and energy components, was expected to have increased slightly to 3.82% year-on-year in February, up from January's estimated 3.70%.

Meanwhile, wholesale price index-based inflation was projected to have risen to 2.36% in February from 2.31% in January, Reuter's survey indicated.