India's CPI continues to cool, which may support subsequent interest rate cuts, but can the rupee withstand it?

Despite the continuous decline in inflation data creating space for the Reserve Bank of India to cut interest rates, factors such as the depreciation of the rupee and slowing economic growth still pose challenges for India in lowering rates. According to data released by the Ministry of Statistics and Programme Implementation of India, the Consumer Price Index (CPI) in December rose by 5.22% year-on-year, lower than analysts' expectations of 5.30%, marking the lowest growth rate since August 2024. This is a significant drop from the 14-month high of 6.21% reached in October. Annual food price growth fell from 9.04% in November to 8.39% in December. Inflation rates for several categories, including vegetables, sugar, grains, and candies, have significantly decreased. The overall inflation rate for vegetables plummeted from 42.18% in October to 26.56% in December. Harry Chambers, an assistant economist at Capital Economics, noted in a report that the lower inflation data creates more room for the Reserve Bank of India to cut interest rates. He predicts that the Reserve Bank of India will initiate a rate-cutting cycle at the monetary policy committee meeting in February, lowering the rate by 25 basis points to 6.25%. However, the weakening rupee makes it more challenging to ease monetary policy. On Monday, the Indian rupee fell to a historic low of 86.58 against the US dollar, marking the largest single-day decline since February 2023. This may force the Reserve Bank of India to maintain higher rates to support the currency. Additionally, the Indian economy grew by only 5.4% in the second fiscal quarter ending September 2024, far below economists' expectations and close to the lowest level in two years. Analysts at Bank of America expect India's GDP to rebound in 2025 but note that "the strength and speed of the recovery are currently uncertain." In November, Bank of America lowered its GDP forecast for India for the fiscal year ending March 2025 from 6.8% to 6.5%, below the Reserve Bank of India's forecast of 6.6%