Retail inflation drops to 4-month low—Is an interest rate cut by RBI on the horizon?
New Delhi (The Uttam Hindu): Retail inflation has declined for the second consecutive month, reaching its lowest point in the last four months. This drop has raised hopes that the Reserve Bank of India (RBI) might soon offer a reduction in interest rates. In December 2024 the inflation rate for vegetables showed some moderation, although the prices of potatoes, peas and cauliflower were still significantly higher than in December 2023.
For the second consecutive month, the public has experienced some relief from inflation. Due to a fall in the prices of essential food items the retail inflation rate for December stood at 5.22% marking the lowest level in four months. While the inflation rate for vegetables showed slight easing, the prices of potatoes, peas and cauliflower remained substantially higher compared to December 2023. In November, the retail inflation rate was 5.48%.
Will RBI Cut Interest Rates?
If the decline in retail inflation continues into January, it could pave the way for a policy rate cut by the RBI. Since February 2023 the RBI has not made any changes to the repo rate. Former RBI Governor Shaktikanta Das had emphasized several times that the central bank’s focus was on reducing inflation with a target of bringing it down to 4%. Now, under the leadership of the new RBI Governor Sanjay Malhotra there are discussions about reducing interest rates due to persistent inflation. Lowering the rates could also help accelerate the sluggish economy. Several ministers, including Finance Minister Nirmala Sitharaman have already called for interest rate cuts. The next RBI MPC (Monetary Policy Committee) meeting is scheduled for February 2025.
What Became Cheaper in December?
In December, the retail prices of vegetables increased by 26.56% compared to December 2023 with potatoes, peas and cauliflower being the major contributors. The prices of potatoes rose by 68.23%, peas by 89.12%, cauliflower by 39.42% and garlic by 58.18%. On the other hand, prices of some items saw a decrease: cumin by 40%, ginger by 22%, and dry chilies by 10%. Additionally, food oils, vegetable oils and fruits saw considerable price increases with food oils rising by 14.60% and fruits by 8.49%.
Highest Inflation in Chhattisgarh and Bihar
There is a significant variation in retail inflation rates across different states of India. The Ministry of Finance is working to ensure that inflation rates are comparable across all states. The data suggests that inflation tends to be higher in less developed states and relatively lower in more developed ones.
Nationally, the retail inflation rate stood at 5.22% in December but states like Delhi, Telangana and Gujarat saw much lower inflation with Delhi at just 2.51%, Telangana at 3.14% and Gujarat at 4.93%. On the other hand, less developed states saw much higher inflation rates compared to the national average with Chhattisgarh recording 7.63%, Bihar at 7.36% and Odisha at 6.96%.
Why is Inflation Lower in Delhi?
Experts suggest that Delhi's relatively lower inflation can be attributed to its status as a major trading and distribution hub for North India. Farmers from neighboring states bring their goods to Delhi, which then supplies the rest of the country. As a result, goods are typically cheaper in Delhi. Additionally, fuel prices in Delhi, including petrol, diesel, CNG and others are relatively lower, further helping in reducing the overall cost of living. These factors contribute to Delhi's advantage in the inflation data.
