Message to RBI in inflation numbers

ByHT Editorial

Mar 16, 2025 07:53 PM IST

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Whether or not the headline number will align itself to the Reserve Bank of India (RBI)’s target of 4% has pretty much become a function of food prices

February’s inflation number of 3.6% is better than what most analysts expected it to be. This is largely on account of a fall in vegetable prices despite inflationary tailwinds from non-food non-fuel items. Core inflation, which measures the non-food non-fuel basket of the consumer price index (CPI), came in at 4% in February, the highest this value has been since November 2023.

Barring any large supply-side shocks in the food economy, analysts believe inflation should be close to RBI’s target in the next fiscal year which will begin from April (HIndustan Times)

What is the larger message behind the inflation numbers? Whether or not the headline number will align itself to the Reserve Bank of India (RBI)’s target of 4% has pretty much become a function of food prices, which are often driven by seasonal shocks. The rising trend in core inflation in the latest numbers is mostly a reflection of things such as gold prices than any systemic overheating in the economy. Barring any large supply-side shocks in the food economy, analysts believe inflation should be close to RBI’s target in the next fiscal year which will begin from April. Upsides from a benign oil price outlook and Chinese overcapacity generating headwinds for commodity prices should neutralise some of the downside risks to inflation outlook on account of rupee depreciation which makes imports more expensive.

The MPC made a 25-basis point — one basis point is one hundredth of a percentage point — reduction in policy rates in February, its first cut in five years. February’s better than expected inflation numbers should convince it to proceed with one more rate cut, which is what most analysts expect will happen. The benefits of these interest rate reductions on lending rates for consumers will take some time to percolate given the lag in transmission mechanism in the banking system. However, the message that monetary policy is pivoting to growth is important.

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