- February inflation slipped below the mid-point of the target range.
- Lower food was the main drag on the headline, core ticked up.
- Weak rupee has not been a constrain on the easing cycle.
- Key risks are global uncertainties and tariff action.
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CPI inflation slips below 4%
CPI inflation moderated to a seven-month low in February to 3.6% yoy (DBSF 3.9%) undershooting the RBI’s 4% target and from 4.3% in January. January-February inflation is tracking an average of 3.9%, below the RBI’s quarterly projection for 1Q25. Building in our early estimate for March, there might be a 40-50bp undershoot in the actual vs RBI’s projected average. Average FY25 inflation stands at 4.7% yoy vs 5.4% in FY24.
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Food disinflation might stall on weather
Food has consistently punched above its weight, as shown in the chart below. With winter disinflation in perishables, particularly vegetables, setting in and better inter-state supplies after a strong summer crop, food inflation eased from 9.7% yoy in October 2024 to sub-4% in February 2025.
Looking ahead, deceleration in food, especially vegetables, inflation might stall in March/ 2Q25. As it stands, vegetables are more susceptible to uneven and volatile weather conditions, compared to food grains/ cereals. Weather agency India Meteorological Department (IMD) has predicted an early and intense summer this year, with prolonged heatwaves at least until May. Notably, February 2025 was not only the warmest since 1901, but also one of the driest in recent years. The chart below highlights food inflation closely tracking vegetables in the past four years.
Upcoming change in food weightage
Findings of the Household Consumption Survey 2022-23 showed households spending more on non-food items than the previous edition of the survey in 2011-12. Share of non-food items in average monthly per capita expenditure (MPCE) stood at 53% and 60% in rural and urban areas, respectively, implying a decline in household spending on food.
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Inflation outlook
Building in our expectation of sequential acceleration in food over the summer months into the southwest monsoon period, we expect inflation to average 4.2% yoy in FY26 from 4.7% in FY25. Key risks to this view stem from a) more severe temperatures/ erratic rainfall than we assume in our baseline; b) geopolitics driven run-up in energy prices; c) tariff action by the US that could raise prices of metals e.g., copper, which can potentially impact firms’ pricing behaviour.
Fiscal and monetary policy support
While currency volatility is a concern for central banks, including the RBI MPC, these are overrun by domestic priorities. The fiscal policy assumed a contractionary impulse on the back of a narrower deficit target for FY26, passing the baton to the central bank. We note policy easing across various fronts which has been set into motion since February, as official growth estimates have aligned towards an anticipated slowdown in the momentum.
Global risks warrant attention
As we detailed in India: Growth uptick likely, tariff turbulence ahead, the upcoming threat of reciprocal tariffs from the US in early-April is a pertinent risk for India.
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