India's inflation slowed to below-expected 5.22% in December

India's annual inflation fell for the second month in a row year-on-year, coming in slightly below expectations at 5.22% in December, Strengthening the case for expected interest rate cuts.

Analysts polled by Reuters had forecast 5.30%. A December report from the Ministry of Statistics and Program Implementation showed that prices grew at the slowest pace since August 2024.

In October, the country's inflation rate hit a 14-month high of 6.21%, exceeding the Reserve Bank of India's tolerance limit of 6%. Reserve Bank of India Governor Sanjay Malhotra predicted on December 24 that inflation for the fiscal year ending in March 2025 would be 4.8%.

Annual growth in food prices, a key indicator, slowed to 8.39% in December from 9.04% in November, with MoSPI citing a “significant decline” in inflation for commodities such as vegetables, sugar, cereals and confectionery. The overall vegetable inflation rate fell to 26.56% in December, down from 29.33% in November, but down sharply from 42.18% in October. Still, peas, potatoes and garlic prices saw three of the highest year-on-year increases last month.

Agriculture is a major component of India's GDP, and Malhotra previously wrote that pressure on the food industry is likely to persist in the third fiscal quarter before starting to ease in the fourth fiscal quarter. This will be due to seasonal adjustment in vegetable prices and the arrival of monsoon harvest, along with likely good yields from winter crops and adequate buffer stocks of cereals.

Weak December inflation data gave the Reserve Bank of India more room to cut interest rates amid slowing economic growth in India. India's economy grew only 5.4% in the second fiscal quarter ended in September, well below economists' expectations and close to its lowest point in two years.

“In terms of policy implications, today's data – coupled with a slowdown in the economy and a shift in a seemingly less hawkish direction by the RBI leadership – suggest that the central bank will initiate an easing cycle at the next Monetary Policy Committee meeting in February. We expect the repo rate to cut by 25 basis points to 6.25%,” Harry Chambers, assistant economist at Capital Economics, said in a note distributed on Monday after the data was released.

However, Rupee depreciation This makes it more difficult to relax monetary policy. The currency fell to a record low of 86.58 against the US dollar on Monday, which may force the Reserve Bank of India to keep interest rates high to support the currency.

The Reserve Bank of India, under former governor Shaktikanta Das, took a split decision at its last monetary policy meeting in December to keep interest rates at 6.5%. Das' term ends on December 11, Malhotra succeeded.

Bank of America analysts said in a report earlier this month that India's GDP is expected to recover in 2025, but noted that “the strength and rebound of the recovery currently appear uncertain.”

The bank believes areas such as agricultural production, fuel consumption, core sector recovery and air traffic are likely to remain strong, while credit growth, fiscal and consumption indicators remain weak.

In November, Bank of America lowered India's GDP forecast for the fiscal year ending March 2025 to 6.5% from 6.8%, which is lower than the Reserve Bank of India's forecast of 6.6%.

— CNBC's Ruxandra Iordache and April Roach contributed to this article.