India's inflation rate dipped to an unexpected 3.61% in February 2025, a development that has caught analysts and policymakers by surprise. The inflation rate, falling below the Reserve Bank of India's (RBI) target of 4%, marks the lowest monthly inflation print since July 2024. Economists, polled by Reuters, had anticipated a higher reading of 3.98%.
The RBI responded to the cooling inflation by reducing the repo rate by 25 basis points in February, a move supported by analysts who foresee further cuts. Experts predict a total reduction of 100 basis points by the end of 2025, potentially bringing the repo rate to 5.50%, aligning it closely with the neutral rate.
"This will bring the repo rate to 5.50% by end-2025, which we identify as being close to the neutral rate," Bank of America analysts stated.
Food inflation, a significant contributor to the overall index, registered at 3.75% in February. Notably, vegetable prices have decreased sharply since October, driven by increased supplies of staples like potatoes and tomatoes. However, analysts caution that this trend may not persist, with potential risks from climatic variations.
"We do expect the correction in vegetable prices to start reversing, possibly as early as March, with risks from heatwaves and weather-related disruptions to crops," noted Bank of America analysts.
Despite the cooling inflation, India's economy continues to show resilience. The nation's GDP growth stood at 6.2% in the fourth quarter, and projections suggest a growth rate of 6.5% for the financial year ending March 2025. This follows a robust expansion of 9.2% in the previous financial year.