India's headline inflation eased to 4.31% in January, marking the third consecutive month of decline, according to official statistics. The Reserve Bank of India (RBI) responded by cutting interest rates for the first time in nearly five years, aiming to stimulate growth in Asia's third-largest economy. The central bank slashed the repo rate from 6.5% to 6.25%, a move that reflects its strategy amid a challenging economic environment.
The decline in inflation was led by a significant drop in vegetable prices, which fell from an annual growth rate of 26.56% in December to 11.35% in January. Food price inflation also saw a notable decrease, cooling from 7.69% in December to 5.68% in January. These reductions contributed to the January inflation reading being the lowest since August 2024 and below economists' expectations of 4.6%.
The RBI's decision to cut rates comes as it grapples with the need to bolster economic growth without further weakening the Indian rupee, which had recently hit a record low. The currency has shown signs of recovery over the past two days, reportedly due to intervention by the central bank.
RBI Governor Sanjay Malhotra explained that the rate cut was prompted by the decline in inflation, which now provides more room for monetary policy adjustments. The bank had previously estimated growth at 6.6%, but has now revised its forecast to align with government estimates at 6.4% for the fiscal year ending March 2025. This forecast marks a downward revision from the previous year's growth of 8.2%.
In light of these developments, the Monetary Policy Committee of the RBI emphasized the opportunity presented by the current economic climate:
"These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target," – RBI (Monetary Policy Committee)
The rate cut is intended to stimulate economic activity, but it poses a risk of further depreciation of the rupee if not managed carefully. The RBI is tasked with balancing these factors to maintain economic stability.