As food costs decline, retail inflation drops to 5.48 percent in November.

A day after Canada reduced rates by a massive 50 basis points, central banks in the euro area and Switzerland also lowered their rates on Thursday. Meanwhile, Australia softened its dovish stance this week.

India is now able to join the rate-cut trend that is sweeping the West thanks to a decline in retail inflation last month that was helped by an almost 200 basis point drop in food inflation.

A day after Canada reduced rates by a massive 50 basis points, central banks in the euro area and Switzerland also lowered their rates on Thursday. Australia, on the other hand, softened its dovish stance this week. Next week, the US Federal Reserve is anticipated to lower interest rates.

According to figures issued Thursday by the National Statistics Office (NSO), retail inflation decreased to 5.48 percent in November from 6.21 percent in October, primarily due to a drop in the price of food, especially vegetables.

With anticipation of additional inflation softening and possible rate reduction by the Reserve Bank of India (RBI) growing, the moderation provided some respite to policymakers.

But only at the RBI's upcoming monetary policy meeting in February, the first under new governor Sanjay Malhotra, is a rate cut anticipated, which increases the likelihood that India's top bank will have to catch up to its counterparts.

Because inflation hasn't dropped to 4% on a sustainable basis, it also begs the question of whether departing Governor Shaktikanta Das and his staff were being overly cautious by declining to lower rates at last week's MPC meeting.

Thanks to a record harvest, food inflation, a major contributor to the Consumer Price Index (CPI), decreased from 10.87 percent in October to 9.04 percent in November.

In October, the overall CPI inflation rate reached a 14-month high of 6.2%.

According to Paras Jasrai, senior analyst at India Ratings, "the decline in retail inflation, especially in food prices, signals a positive trend." "The most recent statistics are consistent with projections for a gradual downturn, even if inflation is still above the RBI's 4% objective. A stronger base effect and declining food prices are expected to sustain a December inflation trend of about 5.0%.

According to CareEdge chief economist Rajani Sinha, dropping food prices and favorable rabi crop sowing conditions would help headline inflation fall below 5% by the end of FY25.

"The Monetary Policy Committee (MPC) can now consider a 25 basis point rate drop in February due to the expected slowdown in inflation.In 2025, we anticipate a 50–75 basis point decrease in the overall policy rate," Sinha stated.

Aditi Nayar, chief economist at Icra, stated that "the likelihood of a rate cut hinges on the continuation of this inflation trajectory." In December, if CPI inflation drops to about 5.0%, the MPC might feel comfortable taking action. In 2025, we expect two rate reductions of 25 basis points.

Rupee drops

As foreign portfolio investment outflows sent the rupee down to an all-time low of 84.88 before rising to settle 3 paise lower at 84.86, forex players seem to be discounting a drop in the US Fed rate next week.

 The rupee hit a new all-time low due to a strong dollar and sluggish domestic markets, according to Anuj Choudhary, research analyst at Mirae Asset Sharekhan.

He added that the dollar appreciated when US inflation increased. But it was consistent with projections.

"Surge in global crude oil prices may further pressurise the rupee," he stated.

The Swiss move

In response to lower-than-expected inflation in Switzerland and mounting concerns about the state of the world economy, the Swiss National Bank lowered its interest rate by 50 basis points on Thursday, the largest cut in nearly a decade, according to Reuters.

The central bank lowered its policy rate to 0.5%, the lowest level since November 2022, from 1%.

On Thursday, the European Central Bank similarly lowered interest rates by a quarter of a percentage point in response to indications of slowing economy.