The ‘core’ of inflation, and RBI’s rate cutting decisions

Between 2023 and 2025, India witnessed significant fluctuations in inflation trends driven by global events (war, El Niño), volatile food and fuel prices, and external sector pressures. In response, the RBI adopted a cautious monetary stance, despite calls to cut interest rates, sparking a wider debate on the effectiveness of monetary policy in addressing supply-driven inflation. As inflation moderates in early 2025, aided by favourable monsoons, softening crude prices, and rupee stabilization, the policy landscape shows signs of change.

Inflation Trends and Monetary Policy Outlook in India (2023–2025):

• Monetary Policy Stance (2023–2025)
  • The RBI maintained the repo rate at 6.5% from Feb 2023 to Feb 2025 to control inflation, despite political and economic pressure to ease rates.
  • Recent cuts in February and April 2025 signal a potential shift, enabled by improved macroeconomic stability.
• Diverging Inflation Components:
  • While headline CPI inflation averaged 5.2%, food inflation (CFPI) remained elevated at 7.6%, driven by supply shocks.
  • Core inflation stayed more stable at 4.1%, reflecting subdued demand-side pressures but recently rose to 4.2%, exceeding RBI’s target.
• Major Supply-Side Shocks
  • Inflation in 2022–2023 was driven by Russia-Ukraine war-induced agri-price surges and global supply chain disruptions.
  • The El Niño of 2023–24 caused deficient rainfall, impacting agricultural output and keeping food inflation high until early 2025.
• Recent Softening of Inflation (2025):
  • In April 2025, CFPI fell to 1.8%, headline CPI to 3.2%—both their lowest in years—due to improved crop output and seasonal factors.
  • Rising core inflation now poses a challenge, suggesting inflation is shifting from food-based to non-food components.
• Agricultural Turnaround and Weather Patterns:
  • The end of El Niño and a forecasted mild La Niña with above-normal monsoons (per IMD) is improving agricultural output.
  • A strong kharif and rabi harvest in late 2024 and early 2025 has eased food supply and inflationary pressures.
• Global and External Sector Influence:
  • FAO food index dropped to 128.3 (April 2025), down from the 2022 peak, aiding global food price correction.
  • Brent crude oil prices declined to $65/barrel, lowering fuel inflation. Rupee stabilized at ?85.5/$, containing imported inflation.
• Capital Flows and Forex Reserves
  • FPI outflows from Oct 2024–Feb 2025 (~$22.7 billion) reversed in May with net inflows of $1.3 billion.
  • Forex reserves recovered to $690.62 billion, boosting investor confidence and stabilizing currency markets.
• Impact of Global Trade Reorientation
  • Trump-era tariffs in the U.S. diverted Chinese and Vietnamese exports toward India, enhancing imported disinflation.
  • The Indian government imposed anti-dumping duties to protect domestic producers without stoking inflation.
• Policy Implications for RBI:
  • With food inflation easing and external risks stabilizing, RBI is now more flexible to consider rate cuts.
  • However, core inflation above 4% may limit aggressive monetary easing, necessitating a calibrated approach.