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Overview
India has seen a substantial decline in retail inflation, offering a welcome macroeconomic boost.
As per NSO data, Consumer Price Index (CPI)-based inflation stood at 2.1% in June 2025, down from 2.82% in May, marking the fifth consecutive month below the RBI’s upper limit of 4%, indicating strong disinflationary momentum.
Current Inflation Snapshot
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Indicator
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Value
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June 2025 Headline Inflation
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2.1%
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May 2025
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2.82%
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Q1 FY26 Average
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2.7%
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RBI Forecast
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2.9%
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Core Inflation (Excluding Food and Fuel)
- Minor rise in June, but not widespread
- Certain segments (e.g., personal care) showed persistent inflation
Food and Beverages
- Experienced deflation of 0.2% in June
- Major contributors: vegetables and pulses
Key Factors Behind Cooling Inflation
- Food Price Moderation
- Sharp decline in perishables due to improved supply management, adequate stocks, and seasonal surplus
- Favourable Monsoon
- As of July 14, rainfall was 9.5% above the Long Period Average (LPA)
- Significant improvement in Kharif sowing, especially rice, pulses, and oilseeds
- Crude Oil Price Drop
- Brent crude fell from $75/barrel (June) to $68/barrel (July)
- Reduction in fuel inflation helped lower transport and logistics costs
- Subdued Core Sector Inflation
- Low inflation in clothing, housing, recreation, household goods
- Reflects weak demand and limited pricing power
Monetary Policy Outlook
Recent RBI Actions
- June 2025 MPC cut repo rate by 50 bps to 5.5%
- Cumulative cut of 100 bps since February 2025
- Objective: Stimulate growth amid easing inflation
Constraints Ahead
- Policy space limited, as RBI signaled caution
- August outlook suggests pause in rate cuts, pending clearer data
- Possibility of revising FY26 inflation forecast (currently 3.7%) downwards
Macroeconomic Implications
1. Household Relief: Lower food prices benefit low-income groups, enhancing real disposable income
2. Consumption Revival: Expected boost in urban and rural demand, aiding sectors like FMCG and retail
3. Interest Rate Transmission: Banks may lower lending rates, encouraging housing, MSME, and auto loans
4. Fiscal Flexibility: Subsidy burden may fall, giving the government greater spending capacity
5. Bond Market Gains: Improved investor sentiment likely to result in lower government bond yields
Risks and Challenges
- Global Commodity Volatility: Possible crude price hikes due to geopolitical issues
- Climate Risk: Monsoon variability may still disrupt crop output
- Sticky Core Inflation: Categories like education and healthcare remain elevated
- Imported Inflation: Weakening rupee may raise costs of imports
RBI’s Balancing Act
RBI must carefully manage growth recovery and inflation control:
- Real interest rates are now positive, encouraging investment
- Too much easing could reignite inflation, while excessive tightening could harm recovery
Global Context
- India’s disinflation stands in contrast to persistent inflation in the US (~3.5%)
- With below-target inflation, India attracts foreign capital due to its macroeconomic stability
Way Forward
- Data-driven policymaking with frequent updates based on agricultural and monsoon data
- Strengthen food supply chains via cold storage and logistics
- Provide targeted support in sectors with sticky inflation (e.g., health, education)
- Diversify oil sourcing via strategic reserves and green alternatives
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