India’s retail inflation slipping below 4 per cent in February signals a crucial inflection point for the economy. This decline, coming after six months of elevated price pressures, provides a breather not just for households grappling with rising living costs but also for policymakers walking a tight-rope between controlling inflation and stimulating growth. For the Reserve Bank of India (RBI), this development reinforces the case for recalibrating its monetary stance, with room opening up for rate cuts in the near term. At 3.61 per cent, retail inflation has undershot expectations and comfortably stayed within the RBI’s tolerance band of 2-6 per cent for four consecutive months.

The sharp moderation in food inflation ~ from nearly 6 per cent in January to under 4 per cent in February ~ has been a significant contributor to this trend. Much of this can be attributed to favourable weather conditions and improved supplies, particularly of vegetables and pulses, whose prices had been stubbornly high through most of the past year. The fact that vegetable prices, which had posted double-digit gains in nine of the previous 12 months, have now registered a year-on-year decline reflects the impact of better supply-side management. The easing of food inflation is particularly important in the Indian context, where food accounts for a substantial portion of household expenditure, especially in lower-income groups. This decline offers some respite to consumers and can potentially improve real disposable incomes, thereby sup porting consumption-driven growth. However, it is worth noting that core inflation, which excludes food and fuel, has remained relatively stable, suggesting that underlying demand conditions in the economy are yet to see robust recovery.

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For the RBI, the moderation in headline inflation offers a window to revisit its policy priorities. After its cautious 25 basis points rate cut in February ~ the first such move in nearly five years ~ the central bank may now feel emboldened to ease rates further. A more accommodative policy stance could help address the sluggishness in economic growth, which, despite some improvement in the final quarter of 2024, remains subdued by India’s own standards. Yet, the road ahead is not without challenges.

Global uncertainties, including potential disruptions to trade due to protectionist measures from major economies, continue to pose risks. Any escalation on this front could complicate the RBI’s task by adding external inflationary pressures or dampening export-driven growth. That said, the current inflation data strengthens the argument for a proactive monetary approach. A cumulative rate cut of 50 basis points over the next few policy meetings appears likely, offering a boost to investment sentiment and credit growth. The key will be ensuring that rate reductions translate into lower borrowing costs across the board. Ultimately, while the fall in inflation offers hope, sustaining price stability and reviving growth momentum must go hand in hand. The coming months will test the RBI’s ability to balance these twin objectives.