Inflation Falls Below 4% as IIP Soars, but Core Inflation Hits 15-Month High

Moneylife Digital Team 13 March 2025

Economy & Nation

India's retail inflation has dropped below the Reserve Bank of India's (RBI) 4% target, hitting a seven-month low of 3.6% in February, down from 4.3% in January. This decline was primarily driven by a significant drop in food inflation, which fell to 3.7%—its lowest level since May 2023. However, despite the decline in headline inflation, core inflation surged to a 15-month high, raising concerns among economists.

In a research note, CRISIL Ratings says, "The fall in headline inflation is welcome, but the rise in core inflation to a 15-month peak indicates persistent demand pressures. While softer food prices are offering temporary relief, the outlook remains uncertain given the volatility in core inflation components."

The consumer price index (CPI) witnessed a slowdown in food prices, especially in vegetables, eggs, pulses, and spices, which fell on a year-on-year basis. Several other categories also reported softer inflation, aided partly by a high base effect. However, the surge in edible oil inflation to a 34-month high of 16.4% and fruit inflation to a decadal high of 14.8% limited the downside.

The index of industrial production (IIP) data also brought positive news, darting up and indicating robust industrial growth, driven primarily by manufacturing and mining activities. Experts believe that while lower food inflation offers respite, the surge in core inflation points to underlying pressures that could challenge future monetary policy decisions.

Economists emphasise that the rise in core inflation, which excludes food and fuel, signals stronger underlying demand, even as food inflation moderates. This raises questions about the sustainability of the recent decline in overall inflation, especially as global commodity prices remain unpredictable.

Moreover, according to the rating agency, the rise in edible oil prices, driven by global supply chain disruptions, and soaring fruit prices due to seasonal factors pose challenges to keeping inflation under control. Policymakers will have to carefully navigate these pressures to maintain economic stability.

The rise in IIP is seen as a positive development, indicating improved manufacturing output and resilience in the industrial sector. However, CRISIL cautions that persistent core inflation could undermine long-term economic stability if not addressed promptly.

"The RBI's monetary policy stance is expected to remain cautious as it balances the conflicting signals from falling headline inflation and rising core inflation. As India moves forward, the focus will likely be on monitoring inflation dynamics closely and adjusting policy interventions as needed," the rating agency says.

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