CPI Inflation Softens in December 2024

 Introduction India’s inflationary landscape witnessed a notable shift in December 2024, with Consumer Price Index (CPI) inflation decelerating to 5.2%. This decline was driven by a broad-based easing of price pressures across key sectors. Kotak Institutional Equities, while maintaining its FY2025 average headline CPI estimate at 4.8%, foresees a gradual glide toward the Reserve Bank of India’s (RBI) 4% inflation target in the months ahead.

Key Inflation Dynamics

1. Food Price Inflation Food inflation moderated to 8.4% year-over-year in December, showing signs of relief after persistent pressures in previous months. Major contributors to elevated food prices included vegetables, oils and fats, fruits, eggs, and cereals. However, durable food inflation remained modest at 3.5%, and volatile food prices, though high at 17.8%, exhibited a softening trend.

Core inflation, excluding volatile components like food, beverages, and fuel, also eased marginally to 3.6% from 3.7% in November. Sequentially, prices in core categories remained stable, supported by declines in gold, silver, and ornaments, which fell by 0.1%, 0.8%, and 1.0%, respectively.

2. Urban vs. Rural Inflation While both urban and rural inflation rates softened, rural inflation continued to outpace urban rates. This persistent gap reflects underlying disparities in consumption patterns and cost structures between rural and urban regions.

Monetary Policy Outlook

Given the softening inflation and broader economic signals, Kotak Institutional Equities maintains its call for a February rate cut. However, caution is warranted concerning the timing and magnitude of rate reductions throughout 2025. The decision-making landscape remains complicated by external risks, including:

• Potential policy shifts from the new U.S. administration, leading to extended pauses by the Federal Reserve.

• Volatility in global oil prices.

• Depreciation pressures on the Indian rupee (INR) amid a strengthening U.S. dollar.

Inflation and GDP Projections

Kotak projects average headline CPI inflation at 4.8% for FY2025 and 4.2% for FY2026. Real GDP growth estimates stand at 6.1% for FY2025, with a slight uptick to 6.4% expected in FY2026. Meanwhile, nominal GDP growth is projected at 10.3% for FY2025 and 10.9% for FY2026.

Conclusion

The recent easing in inflation offers a cautious sense of optimism for India’s economic outlook. However, with persistent global headwinds and evolving domestic dynamics, policymakers and investors must navigate a complex and fluid environment. Monitoring food price volatility and currency movements will be crucial as the nation moves toward achieving sustainable price stability.