India’s Retail Inflation Falls to 7-Month Low of 3.61% in February

India’s retail inflation eased to a seven-month low of 3.61% in February, driven by a broad-based moderation in food inflation, which fell below 4% for the first time in nearly two years. This development has strengthened expectations of a back-to-back rate cut in the Reserve Bank of India's (RBI) upcoming April policy meeting, according to government data released on March 12.

Food Inflation at 21-Month Low

The decline in overall inflation was largely attributed to falling food prices, with food inflation easing to 3.75%—its lowest in 21 months. Notably, vegetable prices entered deflation, recording a 1.1% year-on-year decline in February, compared to an 11.4% increase in January. Pulses, which had been on an upward trajectory, also saw a decline in February after rising 2.6% in the previous month.

However, fruit and edible oil prices remained areas of concern, witnessing an uptick in February. "The problem areas appear to be fruits and vegetable oils. The latter has also been affected by the volatile rupee, which has pushed up import costs," noted Madan Sabnavis, Chief Economist at Bank of Baroda.

Core Inflation Sees Surprise Uptick

While food inflation cooled, core inflation—which excludes food and fuel—rose at its fastest pace in seven months, primarily due to a surge in gold prices. Inflation in miscellaneous goods increased to 4.8% in February, up from 4.4% in January, driven by a sharp rise in personal care and effects inflation, which jumped from 10.6% to 13.6%.

"The moderation in food has been partly offset by much higher monthly momentum in core inflation—the highest in the last seven months! Personal Care and Effects has been the culprit, reflecting the gold price effect, which got a double boost owing to INR depreciation," said Madhavi Arora, Chief Economist at Emkay Global.

Policy Implications: More Room for RBI Rate Cuts

With inflation now comfortably below the RBI’s 4% target, analysts anticipate a further reduction in the policy rate at the upcoming April 2025 meeting of the Monetary Policy Committee (MPC). The RBI had already implemented a 25 basis point rate cut in February, bringing the policy rate down to 6.25% from 6.5%.

"The February 2025 CPI inflation print falling well below 4% has cemented expectations of a back-to-back 25 bps rate cut in the April MPC meeting. This may be followed by another 25 bps cut in either June or August 2025, depending largely on the next Q4 FY2025 GDP growth print," said Aditi Nayar, Chief Economist at ICRA.

Despite the easing inflation, economists caution that tight liquidity conditions could delay the transmission of policy rate cuts to bank deposit and lending rates. While inflation is projected to average 3.8% in Q3 FY26, the scope for further rate cuts remains limited.

A poll conducted before the February GDP data release indicated that the RBI is likely to implement one more rate cut after April, with FY26 expected to end with a policy rate of 5.75%.