India’s retail inflation eased to 5.5% year-on-year in November, down from 6.2% in October, bringing much-needed relief to policymakers. Food inflation also moderated from 10.9% to 9% during the same period. The decline in prices, particularly on a month-on-month basis, has sparked optimism about the possibility of a rate cut at the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting in February.
Month-on-month, food prices fell 0.6%, while overall retail prices dropped 0.15%, primarily due to lower vegetable, fruit, and pulses prices. However, the rise in edible oil prices, up 13.3% year-on-year and 3.1% month-on-month, remains a concern.
The average retail inflation for the first two months of Q3 stands at 5.9%, slightly above the MPC’s projection of 5.7%. However, with a strong kharif harvest expected to further reduce food inflation, the forecast appears achievable, according to experts.
Muted core inflation provides additional support for a rate cut. Core inflation, excluding volatile items such as food and fuel, stood at 3.87% in November, nearly unchanged from 3.85% in October. This indicates limited cost-push inflation pressures, despite recent PMI survey findings that suggested elevated selling price inflation in manufacturing and services sectors.
Growth pangs
Growth indicators, however, paint a mixed picture. The Index of Industrial Production (IIP) rose 2.2% month-on-month in October, but consumer durables production fell 2.2%, reflecting tepid consumption demand. Consumer non-durables production, while slightly higher, remains below pre-pandemic levels.
Rural demand is expected to improve with higher agricultural output, while urban demand could benefit from easing inflation. November’s urban inflation dropped to 4.8% year-on-year from 5.6% in October, with prices falling 0.3% month-on-month.
The decline in non-food bank credit growth to 10.6% in November from 13% in September further underscores the need for policy support. With the Union Budget expected to reduce the fiscal deficit in FY26 and global central banks signaling easing measures, the case for a February rate cut gains momentum.
External factors, including anticipated rate cuts by the US Federal Reserve, could also influence the MPC’s decision.
