Easing core inflation sets stage for more interest rate cuts by RBI

India’s headline and core inflation rates are set to converge in the coming months as the economy slows, increasing the chance of more interest rate cuts.

The core measure -- which strips out volatile fuel and food costs -- has remained sticky at around 6 per cent and is a key reason economists cautioned against more rate cuts after last week’s surprise easing. It softened to 5.4 per cent in January, according to economists at Yes Bank Ltd. and Axis Bank Ltd. Pranjul Bhandari, chief India economist at HSBC Holdings Plc, sees it slowing to as low as 4 per cent this year.

For now, headline inflation eased further as food prices extended their fall, albeit at a slower pace. Consumer-price growth reached 2.05 per cent in January, well below the Reserve Bank of India’s medium term target of 4 per cent.

“It looks like headline inflation will begin to move towards core,” said HSBC’sBhandari. “With rupee and fuel costs stabilising, the core could also start coming down.”

The convergence of the two measures, along with recent surveys from the central bank suggesting slowing inflationary expectations among households and industry, will be key for a clearer assessment of policy actions by the Monetary Policy Committee. The six-member panel last week voted 4-2 to lower the key interest rate.

Shaktikanta Das, the RBI’s new governor, voted for a cut despite only weeks earlier acknowledging the challenges posed by the divergent paths taken by core and food inflation.