India’s Inflation Rate Slows Down, Paving Way for Potential Interest Rate Cuts
Economic Growth Slows, But Inflation Rate Declines
India’s inflation rate has slowed down for the second consecutive month, dropping to 5.22% in December, slightly below expectations. This decline in inflation rate is a welcome respite for the country’s economy, which has been experiencing sluggish growth.
Food Inflation Pressures to Linger
Reserve Bank of India Governor Sanjay Malhotra forecasts an inflation rate of 4.8% for the fiscal year ending March 2025. However, food inflation pressures are expected to persist in the fiscal third quarter, before easing in the fourth quarter due to seasonal corrections in vegetable prices and monsoon harvest arrivals.
Room for Interest Rate Cuts
The softer inflation reading provides more room for the Reserve Bank of India to cut interest rates, which could help boost the country’s slowing economy. India’s economy expanded by just 5.4% in its second fiscal quarter, well below estimates.
Weakening Rupee Complicates Monetary Policy
However, a weakening rupee has made it tougher to loosen monetary policy. The currency depreciated to a record low of 86.58 against the dollar, which could force the RBI to keep rates elevated to support the currency.
Monetary Policy Decisions Ahead
The RBI, under its new governor, Sanjay Malhotra, will need to weigh the pros and cons of cutting interest rates against the backdrop of a slowing economy and a weakening rupee. The bank’s previous governor, Shaktikanta Das, had held rates at 6.5% in its last monetary policy meeting in December.
GDP Forecast Revised Downward
Bank of America analysts have revised their GDP forecast for fiscal year ending March 2025 downward to 6.5% from 6.8%, citing uncertainty around the strength of the recovery. While some areas such as agricultural production and fuel consumption are expected to remain strong, credit growth, fiscal, and consumption indicators are likely to remain soft.
Uncertainty Ahead
As India’s economy navigates these challenges, one thing is clear – the road ahead will be uncertain. With inflation rates slowing down, but growth rates sluggish, the RBI will need to tread carefully to balance the country’s economic needs.
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