Are You Among Them? Smart Investors Know This About India's 3.6% Inflation. Kerala the Outlier!

January sees a 5% surge in industrial output and a 5.5% growth in manufacturing.

India's economic landscape in early 2025 presents a mix of encouraging domestic trends and challenging global uncertainties. Let's break down the key factors at play.

Inflation Down

First, the good news: India's economy is showing signs of recovery. Inflation has dropped significantly, and industrial growth is exceeding expectations. Specifically, retail inflation fell to a six-month low of 3.61% in February 2025, marking a notable improvement from previous months and aligning with the RBI's targets. This decline supports the RBI's decision to cut rates and inject liquidity into the banking system.

Food Inflation

One major driver behind this positive inflation trend is the sharp fall in food inflation. After remaining high for 18 months, food CPI dropped to 3.75% in February. This multi-year low gives the Monetary Policy Committee (MPC) and the RBI confidence to adopt a more dovish stance. However, it's important to note the potential risks. While the current rabi crop is a record one and the world FAO index is softening, the India Meteorological Department (IMD) has forecast an excessively hot summer. This could potentially push up food prices, especially for vegetables, and reverse the current trend of falling food inflation. For now, major food items like vegetables, pulses, milk, meat, eggs, and fish are exhibiting low single-digit inflation. It's a situation that requires close monitoring.

Industrial and Manufacturing Output

Industrial and manufacturing growth are also on the rise, with January seeing a 5% surge in industrial output and a 5.5% growth in manufacturing. This indicates positive economic momentum, driven by demand and supported by fiscal policies.

What is RBI doing?

RBI's 25 basis point rate cut to 6.25%, the first since May 2020, signals a move towards further easing. With current inflation data, more rate cuts are anticipated. The RBI has also injected ₹1.87 trillion into the economy through forex swaps and open market operations (OMOs) in March alone, with further liquidity infusions expected to support lending activities.

Kerala the Outlier!

Interestingly, Kerala stands out as an outlier with an inflation rate of 7.31%, well above the RBI's target range. This is driven by higher food prices, with Kerala's food inflation at 9.9% in January, compared to the national average of 5.68%.

Road Ahead

However, not all is smooth sailing. Global trade tensions pose a significant challenge. The recent tariff increases by the US and subsequent retaliatory measures create uncertainty, potentially slowing global business investment and affecting India's export sector.

In summary, India's economy shows promising signs of recovery, driven by falling inflation and strong industrial growth. However, global trade tensions present significant challenges. The RBI's proactive measures, including rate cuts and liquidity injections, aim to sustain this momentum. The situation in Kerala warrants close attention due to its high inflation rate.