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15 Oct 2025 : Inflation lessons

 Editorial 2: ​​Inflation lessons

Context

The Reserve Bank of India needs to make its forecasts more precise and reliable.

 

Introduction

India’s retail inflation hit a 99-month low of 1.54% in September 2025, giving the Reserve Bank of India (RBI) both relief and a new challenge. While this reflects price stability, it also hints at weak consumer demand. The situation calls for balanced policy action to sustain growth, investment, and wage improvement across key sectors.

Record Low Inflation: Policy Implications for the RBI

  • Retail inflation in September 2025 fell to a 99-month low of 1.54%, marking a major shift for India’s economy.
  • Apart from August, inflation has slowed every month this financial year, averaging 2.2%, which sits comfortably within the RBI’s 2–6% target band.
  • Earlier, when inflation was high, the RBI aimed for 4% as its ideal target. Now, with inflation below that level, it may need to rethink its approach to maintain balance.

Falling Prices and Weak Demand

  • Persistent low inflation signals that supply is outpacing demand in the economy.
  • For instance, clothing and footwear inflation was just 2.3% in September 2025, continuing a steady two-year decline.
  • This trend mirrors China’s oversupply issue, though China offsets it with strong export demand—something India has struggled with, especially amid tariff tensions.

Government Efforts and Consumption Challenges

  • The government has tried to boost demand through income-tax cuts and lower GST rates.
  • However, households saved or repaid loans instead of spending more, while GST cuts only led to short-term buying spurts.
  • What India truly needs is a steady rise in real wages, driven by private sector job growth and investment.

Investment and Policy Response

  • Encouragingly, private investment announcements have risen in early 2025, but these must turn into real projects soon.
  • The RBI can support this by cutting interest rates at its December MPC meeting to stimulate borrowing and growth.
  • With inflation low and private investment lagging, the RBI should favor growth rather than play it too safe.

Need for Better Forecast Accuracy

  • The RBI’s inflation forecasts have been inconsistent this year.
  • In April, it predicted 4% inflation, but by September, it revised it down to 2.6%—a sharp correction in just six months.
  • While economic conditions change, such large forecast errors show flaws in the RBI’s estimation model.
  • Since accurate inflation prediction is central to monetary policy, the RBI must improve its forecasting methodsto guide future decisions more reliably.

 

Conclusion

With inflation below target and investment yet to pick up, the RBI must act decisively. A rate cut could boost private investment and consumer spending. Yet, the central bank also needs accurate forecasting to guide policies better. Sustained growth, higher real wages, and resilient demand should now anchor India’s monetary strategy in this low-inflation phase.