The falling Indian rupee and the global commodity prices can impact the retail inflation targeting of the country, said a report by Bank of Baroda. The report said that depreciating rupee could increase the cost of imports, leading to higher inflation. Furthermore, the report highlighted that the global commodity prices, which had been easing, may start rising again due to trade policies like tariffs imposed by the United States. These factors may pose an upside risk to India’s inflation outlook.
“Upside risks emanate from a depreciating rupee which poses risks of imported inflation and bottoming out of commodity price cycle from threats of tariff imposed by the US,” said the report.
The report also said that India’s consumer price index (CPI) inflation is projected to settle at around 4.9% in the financial year 2024-25 (FY25) and 4.6% in FY26.
“We expect CPI to settle at approx. 4.9% in FY25 and 4.6% in FY26, with risks tilted to the upside,” read the report.
What Else For Retail Inflation?
In January 2025, CPI inflation eased to 4.3% from 5.2% in December 2024. This decline was mainly driven by a sharp correction in food prices. Food inflation fell by 237 basis points (bps), reaching 6% in January from 8.4% in December.
One of the biggest contributors to this decline was vegetable inflation, which dropped significantly from 26.6% in December to 11.3% in January. This was largely due to bumper arrivals of key vegetables like tomatoes, onions, and potatoes (TOP) since November 2024, helping bring prices down.
Meanwhile, core inflation, which excludes food and fuel, remained stable at 3.6% year-on-year. However, when excluding pan, tobacco, and intoxicants, core inflation was slightly higher at 3.7%.
The report noted that core inflation has shown little movement in recent months. Gold prices, on the other hand, surged by 33% on a year-on-year basis during the same period.
Looking ahead, if volatile components like vegetable prices continue to trend downward, achieving the Reserve Bank of India’s 4 per cent inflation target could become more feasible. However, risks remain, and global economic conditions will play a crucial role in determining India’s inflation trajectory.
