Introduction
India’s retail inflation has been on a downward trajectory, reaching a near six-year low of 3.27% in April 2025, down from 3.34% in March. This marks the third consecutive month that inflation has remained below the Reserve Bank of India’s (RBI) 4% target, primarily due to moderating food prices, particularly vegetables, pulses, cereals, and fruits. With inflation under control, the RBI may have increased flexibility to cut interest rates to support the slowing economy.
Factors Contributing to the Decline in Inflation
1. Easing Food Prices
Food prices, which constitute nearly half of the Consumer Price Index (CPI) basket, have seen a significant moderation. Vegetable prices, in particular, have declined, contributing to the overall slowdown in inflation.
2. Core Inflation Trends
Core inflation, which excludes volatile food and energy prices, is projected to have eased slightly to 4.0% in April. This indicates a broader-based moderation in price pressures across the economy.
3. Wholesale Price Index (WPI) Trends
The Wholesale Price Index-based inflation likely declined to 1.76% from 2.05%, further indicating easing price pressures at the wholesale level.
Implications for RBI’s Monetary Policy
1. Room for Further Rate Cuts
With inflation under control, the RBI has increased flexibility to cut interest rates to support the slowing economy. The central bank may consider further monetary easing to stimulate growth.
2. Recent Rate Cut and Policy Stance
In April 2025, the RBI cut its key repo rate by 25 basis points to 6.00% for the second consecutive time and shifted its monetary stance from “neutral” to “accommodative.” This policy change aims to support India’s slowing economy amidst increasing global uncertainties.
3. Expert Opinions
Saugata Bhattacharya, an external member of India’s Monetary Policy Committee (MPC), stated that while India has room for further interest rate cuts due to falling inflation and ongoing economic uncertainties, any additional monetary easing should be approached cautiously. He warned that continued rate cuts and liquidity infusion could eventually shift the growth-inflation balance, especially as economic recovery nears potential, increasing inflation risks.
Economic Outlook
1. GDP Growth Projections
The RBI has revised its FY2026 GDP growth forecast downward to 6.5%, reflecting concerns over global trade tensions and domestic economic challenges.
2. Inflation Projections
Experts believe that CPI inflation will be 3.9% in the fourth quarter of FY25 and will average at 4.7% for the entire year. Looking ahead to FY26, inflation is expected to remain between 4.0% and 4.2%, with core inflation ranging from 4.2% to 4.4%.
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