India's Consumer Price Index (CPI) inflation has eased to 2.82% in May 2025, according to recent data. This figure marks the lowest reading since February 2019, when CPI inflation dipped below 3%. The May 2025 number is down from 3.16% in April and also falls below market expectations of 3%. This brings inflation closer to the Reserve Bank of India's (RBI) lower tolerance threshold of 2% within its inflation-targeting framework.
Several factors have contributed to this significant drop in CPI inflation. A major driver has been the notable easing of food inflation. Food inflation, which accounts for nearly half of the CPI basket in India, fell sharply to 0.99% in May 2025, marking the lowest level since October 2021. This decline is attributed to easing price pressures in several key food categories, including:
The moderation in vegetable prices is particularly noteworthy. While some vegetables like potatoes and tomatoes saw a slight increase from the previous month, the overall trend in vegetable prices has been downward year-on-year. This is a significant factor, as vegetable prices often have a considerable impact on household budgets and overall inflation expectations.
The early arrival of the monsoon season is also expected to contribute to keeping food prices in check. A favorable monsoon typically leads to a good harvest, which in turn helps stabilize or lower food prices. However, it's important to monitor the monsoon's progress, as any disruptions could potentially reverse this trend. The Indian Meteorological Department (IMD) has predicted a revival of the monsoon after a slight slowdown.
The government's proactive measures have also played a crucial role in managing inflation. These measures include:
While headline inflation has decreased significantly, core inflation, which excludes food and fuel, is seen edging up to around 4.2%. Core inflation is considered an indicator of underlying demand pressures in the economy. The RBI expects CPI inflation to average 3.7% in the fiscal year 2026, assuming normal monsoon conditions.
In response to the subdued inflation and with the objective of maintaining growth momentum, the RBI's Monetary Policy Committee (MPC) has been actively cutting interest rates. The latest cut of 50 basis points brought the repo rate down to 5.5%. Furthermore, the RBI has reduced the cash reserve ratio (CRR) by 100 basis points to 3.0% to provide durable liquidity to the banking system. These measures are intended to encourage borrowing and investment, thereby boosting economic activity.
The central bank has shifted its stance to neutral, indicating that further rate cuts are unlikely in the short term unless growth falls significantly below expectations or if unforeseen circumstances cause a sustained spike in prices.
The decline in CPI inflation to a level not seen since early 2019 provides a positive backdrop for the Indian economy. The UN projects India's economic growth to moderate to 6.3% in 2025, while others predict slightly higher growth, still among the fastest-growing economies globally. Factors contributing to this growth include strong consumption, government spending, and growth in services exports. While global trade uncertainties and potential tariffs from the US pose challenges, a possible US-India bilateral trade agreement could flip trade headwinds into tailwinds. The government is expected to boost spending through tax exemptions, potentially adding 0.6–0.7% to GDP growth in FY2026.
