Wednesday, 14 Jan, 2026
Taking advantage of the low inflation environment, RBI Governor Sanjay Malhotra recently announced a 25 basis point cut in the policy repo rate, bringing it down to 5.25 percent. Image Source: IANS
According to an official statement, the marginal rise in both headline and food inflation in December was mainly driven by higher prices of personal care and effects, along with select food items such as vegetables, meat and fish, eggs, spices and pulses.
India’s retail inflation, as measured by the Consumer Price Index (CPI), rose to 1.33 percent in December 2025, marking a modest increase from the exceptionally low 0.71 percent recorded in November, official data showed. Despite the uptick, inflation levels remain well within the Reserve Bank of India’s comfort zone, underscoring a broadly benign price environment.
Food prices continued to exert a strong disinflationary influence, with food inflation staying in negative territory at –2.71 percent during the month. This was the seventh straight month of year-on-year decline in food inflation. While still firmly negative, the figure was slightly higher than the –3.91 percent seen in November, indicating some firming in prices of a few food categories after a prolonged period of sharp deflation.
Source: Ministry of Statistics and Programme Implementation
According to an official statement, the marginal rise in both headline and food inflation in December was mainly driven by higher prices of personal care and effects, along with select food items such as vegetables, meat and fish, eggs, spices and pulses. These increases, however, were not large enough to offset the overall easing trend in prices across the consumption basket.
Even with the mild increase in December, the inflation outlook remains comfortable. Reflecting this, the Reserve Bank of India’s Monetary Policy Committee lowered its inflation projection for 2025–26 to 2 percent from the earlier estimate of 2.6 percent. The downward revision was attributed to a sharper-than-expected fall in food prices as well as the disinflationary impact of recent GST rate reductions.
Taking advantage of the low inflation environment, RBI Governor Sanjay Malhotra recently announced a 25 basis point cut in the policy repo rate, bringing it down to 5.25 percent. He noted that easing price pressures have created sufficient room for the central bank to shift focus towards supporting economic growth. The Governor pointed to robust GDP growth of 8.2 percent in the second quarter of the current financial year, combined with subdued inflation, as evidence of a favourable “Goldilocks period” for the Indian economy.
He further observed that headline inflation has eased more than previously anticipated, largely due to exceptionally low food prices. This has prompted the central bank to revise its inflation projections downward not only for 2025–26 but also for the first quarter of 2026–27. Core inflation, which strips out the volatile components of food and fuel, has also remained largely stable. When the impact of gold prices is excluded, core inflation moderated to 2.6 percent in October, suggesting that underlying price pressures are well contained and that inflation dynamics are becoming more balanced across sectors.
The RBI highlighted that food supply conditions have improved significantly, supported by higher kharif output, healthy rabi sowing, comfortable reservoir levels and favourable soil moisture conditions. In addition, global commodity prices, barring a few metals, are expected to soften further, which should help maintain a stable and supportive inflation environment in the months ahead.
Over the course of the current financial year, the central bank has progressively revised down its inflation outlook while simultaneously upgrading its assessment of economic growth at successive meetings of the Monetary Policy Committee. The inflation forecast for FY26, which was initially placed at 4.2 percent in February, was sharply lowered to 2.6 percent by October, reflecting faster-than-anticipated disinflation, particularly in food prices, and improving supply-side conditions.
Alongside this, the MPC has released a fresh set of quarterly inflation projections that point to a gradual firming of prices over time. Inflation is now expected to average 0.6 percent in the third quarter and 2.9 percent in the fourth quarter of FY26, before rising to 3.9 percent in the first quarter and 4.0 percent in the second quarter of FY27. These estimates mark a significant revision from the October policy round, when inflation had been projected at 1.8 percent for Q3, 4.0 percent for Q4, and 4.5 percent for the first quarter of FY27. The updated projections underscore the central bank’s assessment that the sharp phase of disinflation is behind, even as price pressures remain broadly manageable.
These revisions followed the MPC’s decision to lower the policy repo rate by 25 basis points to 5.25 percent while retaining a neutral policy stance. The move signalled a carefully calibrated approach, aimed at nurturing growth without undermining the central bank’s inflation mandate. In explaining the decision, policymakers described the Indian economy as being in a rare “Goldilocks period”, characterised by a favourable combination of strong growth and low inflation.
Set against this monetary policy backdrop, India has projected real economic growth of 7.4 percent in fiscal 2025–26, highlighting the resilience of Asia’s third-largest economy at a time when global growth is slowing and financial conditions remain tight. External uncertainties, including renewed tariff pressures under US President Donald Trump, have added to global headwinds, yet India’s growth outlook continues to stand out among major economies.
The growth projection is marginally higher than the Reserve Bank of India’s latest estimate of 7.3 percent and represents a clear acceleration from the 6.5 percent expansion recorded in the previous fiscal year. In nominal terms, GDP is expected to grow by 8 percent in the current year, lower than the 9.7 percent growth seen last year, reflecting the moderation in inflation. These macroeconomic assumptions will form the base for the Union Budget, which is scheduled to be presented on February 1.
Economic momentum strengthened further in the second quarter of FY26, with GDP growth accelerating to 8.2 percent, the highest in six quarters. The outturn exceeded market expectations and improved on the 7.8 percent growth recorded in the April–June quarter, pointing to broad-based recovery across sectors.
In comparison, the economy had grown by 6.5 percent and 9.2 percent in the two preceding financial years, underlining both the post-pandemic rebound and the subsequent stabilisation. The latest data suggest that India has entered FY26 with solid momentum, supported by favourable macroeconomic conditions and policy support.
