India's retail inflation slips below 4% for first time in six months, boosts rate cut hopes

By Sarita Chaganti Singh and Manoj Kumar

NEW DELHI (Reuters) -India's retail inflation fell below 4% in February for the first time in six months mainly due to a decline in vegetable prices, giving the central bank room to cut rates further in coming meetings.

Annual retail inflation in February eased to 3.61%, below economists' estimate of 3.98% and the lowest since July. Inflation for January was revised to 4.26% from 4.31%.

The South Asian country's inflation has been within the Reserve Bank of India's (RBI) tolerance band of 2%-6% for four consecutive months.

The slower rate of inflation has been mainly aided by the fall in vegetable prices due to improved supplies on the back of favourable weather.

Food inflation eased to 3.75% in February, the lowest since May 2023, from a revised 5.97% in the previous month. Vegetable prices fell 1.07% year-on-year, compared with an 11.35% increase in January.

Prices of vegetables have been the main driver of inflation for over a year, with a rate of increase of more than 20% in nine out of the past 12 months.

"Inflation decelerated at a faster pace than expected as food corrected sharply in February, on the back of a year-on-year decline in vegetables and pulses," said Radhika Rao, economist at DBS Bank.

Prices of cereals rose 6.1% against a 6.24% increase in January, while those of pulses fell 0.35% compared to a 2.59% growth in the previous month.

Core inflation, which excludes volatile items such as food and energy and is a better gauge of domestic demand, rose slightly to 3.9% to 4% in February from 3.7% in the previous month, according to two economists.

Armed with this low inflation reading, the monetary policy committee is likely to be comfortable in easing rates in April, Rao said.

Some economists expect an additional 50 basis point rate cut between April and August.

In February, the Monetary Policy Committee cut its repo rate by 25 bps for the first time in nearly five years on expectations that inflation would ease and to boost sluggish economic growth.

India's growth in the final quarter of 2024 improved over the previous period but remained relatively soft by its own standards.

To top that, India also faces global headwinds due to uncertainties from U.S. President Donald Trump administration's plans to impose reciprocal tariffs.

India's benchmark bond yield briefly fell to 6.6746% on Wednesday, down 2 bps from its previous close after February retail inflation eased.

(Reporting by Sarita Chaganti Singh; Editing by Sonia Cheema)