India's retail inflation edged up to a three-month high of 1.33% in December 2025, according to data released by the Ministry of Statistics and Programme Implementation. This is a rise from 0.7% in November 2025. Despite the increase, inflation remains significantly below the Reserve Bank of India's (RBI) lower comfort level of 2% and medium-term target of 4%.

The rise in inflation is attributed to a moderation in food deflation and fading favorable base effects. Food inflation, which carries a significant weight in the Consumer Price Index (CPI), remained in deflation at -2.7%, but this was a smaller decline compared to -3.9% in November. Month-on-month data suggests a sequential pickup in food prices, signaling a potential end to the deflationary trend that began in June 2025. Deflation in the food segment narrowed, with vegetable prices declining 18.47% in December compared to a sharper fall of 22.20% the previous month. Higher prices in personal care, vegetables, meat and fish, eggs, spices, and pulses and products also contributed to the rise.

The December inflation reading places the average CPI inflation for the third quarter of FY26 at 0.8%, slightly above the RBI's projection of 0.6% for the quarter. While inflation remains comfortably below the 4% target, the upward drift could lead to a more cautious approach from the central bank. The RBI's monetary policy committee is scheduled to meet on February 4-6, following the Union Budget on February 1, where fiscal signals will be considered alongside inflation and growth trends in their decision-making.

Despite the recent uptick, average prices in 2025 have been the lowest in the past 12 years. In October 2025, India's retail inflation had slumped to a record low of 0.25%, driven by a sharp fall in food prices and tax cuts on consumer goods. This raised hopes for a rate cut by the central bank in December.

The RBI has been cutting policy rates since February of last year, with a cumulative reduction of 125 basis points, supported by low inflation and easing price pressures in food and fuel. However, with inflation expected to move closer to the central bank's 4% target as base effects become unfavorable, the RBI may adopt a more cautious stance.

Fuel and light inflation also saw a decrease, easing to 1.97% in December from 2.32% in November 2025. The clothing and footwear category experienced a marginal easing of inflation to 1.44% in December 2025, down from 1.49% the previous month.