Retail Inflation Hits 6-Year Low

Syllabus: Economy [GS Paper-3]

14/06/2025

26 3 minutes read

Image Credit: Sushil Kumar Verma

Context

India’s retail inflation has recently touched a six-year low, marking a significant milestone in the country’s economic trajectory. The Consumer Price Index (CPI)-based retail inflation for May 2025 was recorded at 2.82%, the lowest since February 2019. This development is a result of coordinated monetary, fiscal, and administrative measures, and offers a favorable environment for both policymakers and consumers.

Key Drivers Behind the Decline in Retail Inflation

Sharp Drop in Food Inflation: The primary factor that brought the decline in retail inflation has been a sharp cool-down in food prices. Food inflation dropped to a low of 0.99% in May 2025 from 1.78% in April (down 79 bps). Food inflation in rural and urban India stood almost uniformly at 0.95% and 0.96%, respectively, indicating moderation across geographies. The trend has been supported on account of good agricultural supply and well-placed government interventions.
Favorable Base Effects and Lower Prices of Essentials: Other than a decent base effect basis of comparison, inflation also benefited from a broad-based decline in prices for essential items like pulses, vegetables, fruits, cereals, and household items. For example, vegetable prices fell by 13.7% year-on-year in May, compared with a year-on-year drop of 8.22% for pulses and pulse-related products. The declines were sharper than those for the past few months, thereby indicating better supply and market conditions.

Sectoral Trends and Government Interventions

Agriculture and Food Supply: The government’s strategic buffer stock management, periodic open market releases, and targeted subsidies have played a pivotal role in stabilizing food prices. Simplified import duties on critical food items, stricter stock limits to prevent hoarding, and reduced GST rates on essentials have further eased price pressures. Subsidized retail sales of staples like rice, wheat flour, pulses, and onions, along with targeted schemes such as the Pradhan Mantri Ujjwala Yojana and Pradhan Mantri Garib Kalyan Anna Yojana, have protected vulnerable households from rising food grain costs.
Core Inflation Dynamics: While headline and food inflation have moderated, core inflation—which excludes volatile food and fuel prices—remains relatively elevated. Core-CPI inflation eased slightly to 4.3% in May 2025 from 4.4% in April, indicating persistent inflationary pressures in non-food, non-fuel categories. This suggests that while the immediate food-driven price pressures have abated, underlying inflationary risks remain.

Policy Response and Monetary Measures

RBI’s Accommodative Stance: In response to the easing inflation environment, the Reserve Bank of India (RBI) has shifted its monetary policy stance from “neutral” to “accommodative.” The central bank has implemented two consecutive rate cuts, reducing the policy repo rate by 25 basis points each in April and June 2025, bringing it down to 6.00%. These moves are aimed at supporting economic growth while keeping inflation in check.
Revised Inflation and Growth Forecasts: The RBI has revised its inflation forecast for FY26 downward to 3.7%, reflecting improved inflation dynamics. The central bank has also lowered its GDP growth estimate to 6.5% for the fiscal year, citing global uncertainties and trade tensions as potential risks. The current focus is on supporting capital formation and durable growth, with expectations of a pause in further rate cuts until at least December 2025, barring any unforeseen shocks.

Risks and Challenges Ahead

Monsoon and Agricultural Risks: The progression of the South-West monsoon is crucial for sustaining the current trend of low food inflation. While the monsoon arrived early in 2025, its progress has been uneven, raising concerns about potential crop damage due to excessive or concentrated rainfall. The temporal and spatial distribution of rainfall will be key to ensuring favorable crop yields and preventing any sudden spikes in food prices.
Global and Domestic Uncertainties: Ongoing global market uncertainties, including trade tensions and supply chain disruptions, could pose risks to domestic inflation. Fluctuations in global commodity prices, especially crude oil, could increase fuel and transportation costs, exerting upward pressure on prices. Additionally, adverse weather conditions and geopolitical tensions remain key monitor cables.

Conclusion

The easing of retail inflation to a six-year low is a testament to the effectiveness of India’s policy framework in balancing price stability with economic growth. While the immediate outlook remains positive, the trajectory will depend on monsoon performance, global commodity price movements, and the continued effectiveness of government interventions. Policymakers must remain alert to emerging risks to sustain the current favorable inflation environment and ensure inclusive growth.

Source: The Hindu