India is currently grappling with an unusual economic situation: a record low inflation rate. While low inflation might sound appealing, as it implies that the prices of goods and services are stable, excessively low inflation can signal deeper economic problems. The consumer price inflation rate in India fell to a record low of 0.25% in October 2025, a significant drop from 1.44% the previous month. This is the ninth consecutive month that the inflation rate has remained below the Reserve Bank of India's (RBI) target of 4% and the third consecutive month where it has been below the lower tolerance band of 2%.

Understanding the Current Scenario

The primary driver behind this disinflation is a sharp decline in food prices, particularly vegetables, cereals and pulses, due to improved weather conditions. The recent rationalization of the Goods and Services Tax (GST) has also contributed to the decline.

However, the situation is more complex than it appears. Core inflation, which excludes food and fuel, has not fallen as sharply, indicating that underlying demand in the economy remains steady but not strong enough to significantly boost growth. Moreover, despite the low official figures, inflation expectations among households remain high, as their everyday expenses, such as rent, education, healthcare, and transport, have not decreased.

Potential Risks of Low Inflation

Prolonged periods of very low inflation can pose several risks to the Indian economy:

• Weak Demand: It can signal weak demand, where consumers spend less and businesses are unable to raise prices, potentially leading to delayed investments and postponed purchases.
• Economic Stagnation: If businesses feel buyers are holding back, they may delay investments. Consumers may also postpone purchases if they expect prices to fall further, which can slow economic growth.
• Deflationary Pressures: While not the current case, very low inflation can sometimes lead to deflation, a sustained decrease in the general price level, which can be detrimental to economic activity.

What India Can Do

To address the challenges posed by low inflation, India can consider a multi-pronged approach:

• Monetary Policy Adjustments: The RBI may consider further reducing interest rates to encourage borrowing, investment, and overall economic activity. The MPC delivered a cumulative 100 bps rate cut in early 2025. The rates have remained unchanged since the August policy review. Several global banks and economists expect a 25 basis points repo rate cut in December 2025, possibly ending the current easing cycle.
• Fiscal Stimulus: The government can increase public spending on infrastructure projects and social programs to boost demand and create jobs. When inflation rises, the government may reduce its spending or increase taxes to lower demand. Lower spending or higher taxes mean less money in the economy, reducing people's buying power and slowing price increases.
• Supply-Side Measures: Improving supply chains, transportation, storage, and distribution of essential goods can prevent shortages and stabilize prices. Efficient supply chains ensure that goods reach markets on time and in sufficient quantities, stabilizing prices and reducing inflation pressure.
• Promoting Competition and Preventing Hoarding: Enforcing laws against monopolies and hoarding can prevent businesses from creating artificial shortages or unfairly raising prices. Promoting competition and preventing hoarding stops businesses from creating artificial shortages or raising prices unfairly. When businesses compete fairly, prices stay reasonable, helping control inflation.
• Managing External Factors: The government should monitor and manage the impact of global commodity prices and exchange rate fluctuations on domestic inflation.

RBI's Inflation Targeting Framework

Since 2016, the RBI has aimed to maintain inflation at 4%, with a tolerance range of 2% to 6%. The current target of 4% headline CPI inflation, with a “tolerance band” of 2-6%, was extended in 2021 and ends in May 2026. Given the current low inflation, there are discussions on whether the 4% target should be dropped in favor of a target range and whether the RBI should target headline inflation or switch to targeting core inflation.

Conclusion

India's low inflation presents both opportunities and challenges. While it provides relief to consumers and opens possibilities for monetary easing, it also raises concerns about weak demand and potential economic stagnation. By implementing a combination of monetary and fiscal measures, along with supply-side reforms, India can effectively address the low inflation problem and ensure stable and sustainable economic growth.