R. Suryamurthy
India’s retail inflation in June unexpectedly plummeted to its lowest level since January 2019, rekindling speculation about further interest rate cuts by the Reserve Bank of India (RBI) at its upcoming monetary policy meeting.
Government data released on Monday showed the Consumer Price Index (CPI) eased to 2.10% year-on-year, a significant 72 basis point drop from May’s 2.82%. This sharp deceleration was primarily driven by a dramatic contraction in food prices.
The Rate Cut Debate Ignites
The surprising decline in inflation, which falls well below the RBI’s 4% medium-term target, has analysts divided on the prospect of another rate cut.
Aditi Nayar, Chief Economist at ICRA Ltd., believes the door is open. “We are not ruling out the possibility of a final 25 bps rate cut in the August 2025 meeting, carrying forward the front-loading seen in June 2025,” she stated. Nayar pointed to the Consumer Food Price Index (CFPI) registering year-on-year deflation of 1.06% in June, a sharp 205 basis point swing from May and the first food deflation since January 2019. This cooling was “entirely led by the food and beverages (F&B) segment,” she added.
Similarly, Joe Maher, Assistant Economist at Capital Economics, suggested the “larger-than-expected fall in India’s consumer price inflation to 2.1% y/y in June raises the prospect of the RBI cutting interest rates further at its policy meeting next month.”
However, others remain cautious. Madan Sabnavis, Chief Economist at Bank of Baroda, argued that while the Q1 inflation at 2.7% is lower than the RBI’s 2.9% estimate, “given the upward trajectory expected in the coming months, this benefit may not be significant… this number will not have any impact on the policy decision and hence a status quo can be expected.”
Maher also sounded a note of caution, stating that despite the data, the RBI’s sizeable 50 basis point cut in June and shift in policy stance to “neutral” suggest “the bar to a resumption in the easing cycle is high.” He concluded, “As a result, we are sticking to our view that policy settings will be left on hold in August.”
Deflationary Forces at Play
The disinflationary momentum was primarily fuelled by a broad-based decline in food prices. Key staples like vegetables, pulses, cereals, milk, meat and fish, sugar, and spices all saw sharp year-on-year declines. For instance, vegetables contracted by nearly 19% annually, with tomatoes plunging 31.5% and onions 26.6%. Pulses like tur also recorded a 25.1% deflation. This was aided by a favourable base effect and improving supply-side conditions.
The easing was evident across both rural and urban regions. Rural headline inflation fell to 1.72% in June from 2.59% in May, while urban inflation eased to 2.56% from 3.12%. Rural food inflation dipped to -0.92%, and urban food inflation dropped more sharply to -1.22%.
Core Inflation Remains Sticky
While food prices offered relief, core inflation—which excludes volatile food and fuel components—showed some stickiness. Nayar pointed out that core-CPI inflation inched up to 4.6% in June from 4.3% in May, driven by miscellaneous items. Sankar Chakraborti of Acuité Ratings noted that categories like education (4.37%), health (4.43%), and transport & communication (3.90%) continue to remain sticky. Furthermore, items such as coconut oil (+97.2%), gold (+36.0%), and silver (+17.8%) exhibited sharp price increases.
Outlook and Risks
Looking ahead, economists are closely monitoring the monsoon season, a critical factor for India’s agricultural output and food prices. Kharif sowing is up by a robust 6.6% as of July 11, which bodes well for containing future food prices. However, ICRA remains watchful for potential crop damage from “episodes of heavy rainfall and flooding across some states.”
Acuité Ratings projects headline CPI inflation to remain under 3.5% until December 2025, revising its FY26 inflation forecast down to 3.5% from 3.8%. ICRA expects the headline CPI inflation to recede further and bottom out at around 1.9% in July 2025.
The next retail inflation figures for July 2025, a crucial input for the RBI’s August policy decision, are scheduled for release on August 12, 2025. Will this sustained low inflation prompt another unexpected move from the central bank? Only time will tell.