Holi cheer for now, hope for the best

Retail inflation fell to a 7-mth low of 3.6% in February, driven by falling vegetable prices, official data showed on Wednesday. But the pre-Holi gains are likely to be short-lived with heatwaves predicted in the country as early as March. Vegetables have been the main driver of inflation in the last 12 months, and the correction is set to reverse when winter stocks run down. Inflation is officially projected to average 20% higher than the target in the current financial year. But it could undershoot in the January-March quarter. Moderation expected beyond March is predicated on a normal monsoon, and retail inflation should arrive at its target without any serious rainfall deficiency. This opens a window for RBI to push ahead with interest rate cuts. However, it can't look through spikes in food inflation.

RBI could, over the course of summer, reverse a third of the cumulative 2.5-percentage-point rate hikes it undertook during monetary tightening. It will also be working in tandem to ease systemic liquidity during and after the year-end hump. Monetary policy is resetting to support India's slowing growth and need to cushion the economy from effects of reciprocal US tariffs. Core inflation, which has ticked up, does not suggest a departure from monetary easing so long as headline inflation remains on target. In the event of serious trade fragmentation, commodity prices should remain soft on account of global oversupply. This eases pressure on core inflation, which has been within the policy comfort zone for a while now.

RBI's monetary policy committee will not have a usable monsoon prediction before its next review meeting in April. But it will have a clearer picture in June. However, heat-related data is available in real time and is a leading indicator for food inflation. February was the hottest and driest in over a century, and the projection for March to May is higher than normal heatwave days.