The Retail inflation of 6.21% in October 2024 may disturb the Reserve Bank of India (RBI). Most of the price increase was caused by vegetable inflation, which was 42% year-on-year and 11% from September.

Core inflation, which excludes volatile food and fuel prices, rose to 3.7% from 3% at the start of 2024. Economists even expect retail inflation to be as high as 5.3% by to 5.5% and in November, away from the RBI. the binding target of 4%.

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In the near term, grain prices could make the RBI’s task harder. The central bank has repeatedly said it wants CPI to move towards 4% in a sustainable manner.

Retail inflation is too high to decline too quickly

Current trend shows inflation may not cool down even by February, forcing RBI to hold back reducing interest rates anytime soon. The bigger worry for the RBI is the likelihood of being caught between higher-than-expected inflation and lower-than-expected growth.

Around 3% growth in industrial production in July-September, slower pace of GST collection in August and subpar corporate earnings in the second quarter all indicate that the second quarter GDP could reach 6 .5% to 6.6%, well below the RBI forecast of 6.8%.

The weaker rupee is also a roadblock to a rate cut

The other big imponderable for the RBI is the foreign exchange market. A well-respected central bank principle is not to cut rates

when the currency weakens.

While a December cut is out of the question, it is possible that in the first week of February, when the RBI-MPC meets again, President Trump, who has only been in the White House for 2 weeks, will announce a slew of rate hikes tariffs or tax breaks for US companies. Both moves may keep emerging market currencies from weakening further.

One consolation, as Goldman Sachs helpfully points out, is that inflation is just under 4% if we exclude the increase in vegetable prices.

Why do food prices never drop substantially in India?

The biggest concern for the RBI will be cereals (up 6.94%) and edible oils (up 9.5%). Niti Aayog’s Ramesh Chand, arguably one of India’s best economists, told CNBCTV18 that the formula for arriving at minimum support prices (MSP) for crops has a built-in structural bias to drive up prices.

India arrives at MSP by including all costs involved in growing a crop, including family labour, at a 50% markup.

Chand argues that in other parts of the world prices of agricultural products rise in deficit years and then fall in surplus years. However, in India, food prices never go down because MSP can never go down. He fears that we can only wake up when our agricultural exports become uncompetitive.

However, 2025 may also bring some disinflationary factors:

1. The price of crude oil did not exceed $78-80 per barrel in the last quarter, despite strong US data, Chinese stimulus and an escalation of the Israel-Palestine war. Chances are, with Trump encouraging more drilling, crude oil may prove to be a disinflationary element for India.

2. Tariffs on Chinese exports to the US may also mean that China is dumping more goods, even at lower prices, onto global markets. China’s slower growth may also have a disinflationary impact on global commodities.

3. Brokerages see Trump’s tariffs, if poorly imposed, also hurting US growth. And this may cause some disinflation later in the year.

In short, while a December cut is clearly off the table, 2025 may be a year with very different macros and certainly, a lot of uncertainty.