Why India’s Inflation Just Hit a 7-Month Low- What’s Behind the Drop?

 

  #Inflation, #EconomicOutlook, #RetailInflation, #CoreInflation 

Synopsis:

India's inflation eased to 3.6% in February 2025, marking a seven-month low, thanks to falling vegetable prices. While core inflation edged above 4% after more than a year, industrial production gained momentum. The recent SBI Ecowrap report shows key factors such as  major economic trends, growing imported inflation, rural & urban inflation gaps, as well projections for RBI’s interest rate cuts.

 Key Highlights

·         Retail Inflation Falls to 3.6% in February 2025,  Seen lowest in 7 Months

·         Core Inflation Rises to 4.08%,  Seen to be Highest in 14 Months

·         Industrial Output Grows 5% in Jan 2025, Boosted by Mining & Manufacturing

·         Imported Inflation Soars to 31.1% in Feb 2025, Driven by Oil & Metal Prices

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India Inflation and Economic Outlook

 India’s CPI inflation - Consumer Price Index - dropped to 3.6 percent in February 2025, its lowest level in 7 months, mainly due to falling vegetable prices. As per the SBI Economic Research, food and beverage prices eased sharply, cutting down overall inflation.

 Vegetable prices declined steeply, pushing the vegetable CPI into negative territory (-1.07 percent) for the first time in 20 months. Garlic, potatoes, and tomatoes comprised about 80 percent of this fall. Analysts believe garlic prices fell significantly due to lower demand during the Maha Kumbh when people cut back on non-vegetarian food.

 At the same time, fruit prices surged to a decade-high inflation rate of 14.8 percent, likely because of rising demand during fasting periods linked to the Maha Kumbh. Fuel and light prices continued their deflationary trend, which has now lasted for 18 months. Non-vegetarian food (eggs, meat, fish) inflation also slowed, possibly driven by seasonal dietary changes.

 Despite the overall slowdown, core inflation increased to 4.08 percent, marking its highest level in 14 months. Core inflation tracks price changes that last longer and gives a clearer picture of the economy's deeper inflation trends.

The report also points out that rural inflation continues to exceed urban inflation, based on fluctuating food prices.  India’s Index of Industrial Production (IIP) on the industrial front, grew by 5.0 percent in January 2025, with mining and manufacturing sectors leading the growth.

 Imported inflation rose sharply, from 1.3 percent in June 2024 to 31.1 percent in February 2025. The surge was mainly factored by higher prices of oils, fats, and precious metals.

 Looking ahead, the Reserve Bank of India is likely to reduce the rate of interest rates by at least 75 basis points in 2025, with reductions expected in April and August.

 Corporate earnings stayed strong in the 3rd  quarter of Fiscal 2025, with companies posting revenue growth of 6.2 percent, EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)  growth of 11 percent, and Profit After Tax (PAT) growth of 12 percent.

 The March 12, 2025 edition of SBI Ecowrap offers a detailed illustration of India's economic health, focusing on future monetary policy expectations, inflation trends,  and industrial performance.

 How Inflation and Interest Rates Are Connected

 Learn how rising prices (inflation) and borrowing costs (interest rates) work together to shape the economy and your daily life. This simple explanation will help common people understand why prices go up and how banks use interest rates to control them.

 What Is Inflation?

 Inflation is when prices of goods and services increase over time. It makes your spending less than it did before. For example, if a toy cost Rs. 10 last year but now costs Rs. 12, that is called inflation.

 Some things, like Mobile and computers, might get cheaper over time because of technology. But most necessary things like rent, healthcare, and food, usually become more expensive.

 What Causes Inflation?

 Many things cause inflation:

·         More people are borrowing and spending money.

·         Companies raising wages.

·         Disruptions like supply chain issues.

 People expect prices to rise, so they spend faster. This pushes core inflation to 4.08 percent, the highest in 14 months. It shows lasting price trends and deeper inflationary pressures in the economy.

 How Do We Measure Inflation?

 Experts check inflation using special tools:

·        Consumer Price Index (CPI): It tracks price changes for everyday items like groceries, haircuts, and school supplies.

·        Personal Consumption Expenditures (PCE): It looks at how people change what they buy when prices rise.

·        Producer Price Index (PPI): It checks how much it costs companies to make goods. If their costs go up, prices for customers also usually go up.

·         Core Inflation: This measure ignores food and energy prices because they change a lot due to weather or world events.

 How Do Interest Rates Help Control Inflation?

Interest rates are like a brake for inflation. When inflation rises too fast, banks like the U.S. Federal Reserve raise interest rates.

 When interest rates go up:

·         Borrowing money becomes harder and more expensive.

·         People might skip buying big things like cars or houses.

·         Companies may delay new projects.

·         Families spend less to keep up with higher credit card or loan payments.

·         All of this helps slow down how fast prices rise.

 What Happens When Inflation Is Low?

 If the economy is weak or inflation is low, banks lower interest rates. This makes borrowing cheaper and it helps people and businesses to spend more. More spending can help the economy grow and bring prices up to a healthy level.

 The Federal Reserve's 2 percent  Inflation Goal

The Federal Reserve tries to keep inflation at around 2 percent per year. This is enough to keep the economy growing without prices rising too quickly. If inflation is too high or too low, it can be tough for businesses and families.

Why Interest Rates Cannot Fix Everything

Raising interest rates does not always work perfectly:

·         It takes time for changes to affect the economy.

·         Some areas, like housing or cars, are hit harder than others.

·       If prices go up because of supply issues such as a shortage of computer chips or oil etc, raising interest rates would not solve that.

 Why It Matters to You

 When you hear adults talk about inflation or interest rates, they are talking about how much things cost and how easy or hard it is to borrow money. Knowing how these two work together helps you understand why you might spend less or why saving money becomes more important