India's inflation rate declined for a second consecutive month, recording a year-on-year decrease to 5.22% in December, the lowest since August 2024. This softer inflation reading has raised prospects for the Reserve Bank of India (RBI) to consider rate cuts amid the nation's slowing economic growth. The current inflation rate falls beneath analysts' expectations, who had projected a 5.30% rise.
RBI Governor Sanjay Malhotra has forecasted an inflation rate of 4.8% for the fiscal year ending March 2025, suggesting a potential easing of inflationary pressures. Despite this optimistic outlook, food inflation pressures are expected to persist into the fiscal third quarter. Previously, India's inflation had surged to a 14-month high of 6.21% in October, surpassing the central bank's 6% tolerance threshold.
The RBI, under its former governor Shaktikanta Das, maintained rates at 6.5% during its December monetary policy meeting through a split decision. However, with Malhotra at the helm since December 11, the softened inflation figures may afford the central bank more flexibility to reduce rates, aiming to stimulate growth.
India's economy grew by a mere 5.4% in the second fiscal quarter ending September, falling short of economists' forecasts and nearing a two-year low. This sluggish growth prompted Bank of America analysts to downgrade India's GDP forecast for the fiscal year ending March 2025 to 6.5% from an earlier estimate of 6.8%. The RBI has projected a slightly higher GDP growth rate of 6.6% for the same period.
"The strength and rally of the recovery seems uncertain for now." – Bank of America analysts
Additionally, the depreciation of the Indian currency to a record low of 86.58 against the dollar on Monday poses further challenges. This currency weakness might compel the RBI to maintain higher interest rates in an effort to support its value.