India’s March inflation slowed to 3.34% yoy, six-year low, vs 3.6% month before. This took Jan-Mar25 inflation to 3.7% vs the RBI’s December projection at 4.5%. Full year FY25 inflation averaged 4.6% yoy vs 5.4% in FY24. Much of the disinflation in March was on the back of food, which eased to 2.9% yoy, with the index punching below its weight for the first time in over 20 months. Deceleration was broad-based, including vegetables, pulses, spices and eggs, whilst fruits and edible oil ticked up on sequential basis. Non-food pressures were also capped, even as the fuel & light category returned to black after a year and a half. Along expectations, high precious metals, education and health contributed to firmer service inflation. Reflecting these developments, core inflation (ex food and fuel) stayed above 4% for a second consecutive month. Our core core gauge (ex food, fuel, precious metals) was subdued at 3.2%, steady from month before. Encouragingly about 70% of the inflation basket is rising by less than 4% as of Mar25. March WPI inflation also undershot expectations at 2.1% yoy, with the ongoing decline in commodity prices, especially the energy complex, expected to significantly soften this price trend. A consequent lower deflator will bode well for underlying/ real growth trends.
Looking ahead, we build modest weather-related disruption to food disinflation in Apr-Jun due to higher temperatures and drier conditions. Early data for April shows prices of horticulture output ticking up modestly while non-food is largely steady, pointing to another sub-4% print. The hike in LPG prices will filter through in the coming months. With global oil prices on a slippery slope and recent rupee strength, imported forces are in check. Consequently, we revise FY26 inflation projection to 3.8% vs 4.2% earlier and see modest downside risks. Soft inflation numbers back the central bank’s dovish pivot at the April meeting, where the rate cut was accompanied by a change in the policy stance. We look for a follow-up cut at the June meeting. The RBI, separately, surprised with additional liquidity measures, announcing plans to conduct open market operations worth INR 400bn and conduct 43-day repo at INR 1.5trn on Thursday. In contrast to higher US yields, INR bond yields have fallen to near three-year lows this week, led by the short end. 
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