In a positive development for monetary policy, India's consumer price inflation rate witnessed a decline in February, offering some breathing room for the country's central bank. The consumer price index (CPI) rose by 3.61% year-on-year in February, a notable decrease from the 4.26% rate recorded in January and significantly lower than the peak of 6.21% seen in October of the previous year, as reported by the National Statistics Office (NSO). Recent months have seen Indian consumers grappling with rising food costs, which surged by 10.87% year-on-year in October.
However, there has been a stabilization in food prices, leading to a more modest 3.75% increase in food bills for February. This moderation in food costs has played a crucial role in curbing overall inflation, according to the NSO. Contributing further to this downward trend, bills for fuel and light saw a decline of 1.33% year-on-year during February.
This reduction is a welcome development for households amid ongoing economic challenges. The Reserve Bank of India (RBI), tasked with maintaining price stability, has set a target inflation rate of 4%, with a tolerance range of plus or minus 2%. In a significant policy shift during its early February meeting, the RBI reduced its key policy rate for the first time in five years, lowering the repo rate from 6.50% to 6.25%. During the same meeting, the RBI projected that India's economy would grow by 6.7% year-on-year in the fiscal year 2025-26, starting on April 1.
Additionally, the central bank estimated that the average inflation rate for the fiscal year would remain at a manageable 4.2%. This forecast aligns well with the RBI's target band, reflecting optimism about economic resilience. In the wake of the COVID-19 pandemic, the RBI previously maintained a historically low repo rate of 4% during 2020 and 2021 to stimulate recovery.
However, in response to rising inflation, the central bank increased the key rate to 6.5% by February 2023 and maintained that level until February of this year. Looking ahead, the next RBI policy meeting is set to commence on April 7, where further decisions will be made regarding monetary policy in light of ongoing economic conditions..