Context:
India’s retail inflation for September 2025 stood at 1.54%, the lowest in 99 months, signalling a phase of disinflation with significant implications for the Reserve Bank of India’s (RBI) monetary policy strategy and forecasting accuracy.
Key Highlights / Details:
- Trend in Inflation:
- Average retail inflation for the first half of FY2025–26 is 2.2%, just within the RBI’s comfort band of 2–6%.
- Except for August, inflation has been declining consistently each month in the current fiscal year.
- Sectoral Insights:
- The clothing and footwear category reported 2.3% inflation in September 2025, reflecting oversupply and weak demand.
- Inflation has remained subdued across multiple sectors for nearly two years.
- Demand and Policy Measures:
- The government has attempted to boost demand through income-tax rebates and GST rate reductions.
- However, consumers are focusing on saving and debt reduction rather than increasing consumption.
- Monetary Policy Implications:
- With inflation persistently below the 4% target, there is an argument for the RBI to reassess its inflation projection methodology.
- The central bank may need to adjust policy rates more dynamically to support growth while maintaining price stability.
- Forecasting Challenges:
- In April 2025, RBI had projected annual inflation at 4%, later revising it down to 2.6% — a sharp divergence suggesting forecasting inaccuracies.
- A more data-driven and adaptive model is needed to capture shifts in consumption and global demand patterns.
Relevant Prelims Points:
- Inflation Targeting in India: Adopted under the Monetary Policy Framework Agreement (2016); target = 4% ± 2%.
- CPI (Consumer Price Index): Main measure for retail inflation in India, compiled by NSO, MoSPI.
- RBI’s Monetary Policy Tools: Repo rate, reverse repo, CRR, SLR, and Open Market Operations (OMOs).
Relevant Mains Points:
- Economic Stability: Importance of accurate inflation forecasting in ensuring monetary policy credibility.
- Policy Transmission: Role of rate cuts and fiscal stimulus in boosting private consumption.
- Macroeconomic Coordination: Balancing low inflation with sustainable growth in a post-pandemic, low-demand economy.