India CPI Review: Headline inflation drops sharply on account of food prices
India’s retail inflation fell to 1.55% yr/yr in July 2025, its lowest since 2017 and below the RBI’s 2–6% target band for the first time in over six years. The drop was driven by a sharp contraction in food prices, even as edible oil and fruit inflation remained elevated. With inflation well below forecasts, the RBI has greater policy space, though further rate cuts remain unlikely unless global risks intensify.
India’s retail inflation dropped sharply to 1.55% yr/yr in July 2025, down from 2.1% in June, marking its lowest reading since June 2017 and the second-lowest since the CPI series began. For the first time since January 2019, headline inflation slipped below the Reserve Bank of India’s 2–6% target band, extending the ongoing disinflation streak to nine months.
The primary driver was a deeper contraction in food prices. The Consumer Food Price Index (CFPI) fell 1.76% yr/yr, the steepest decline since early 2019, with rural food inflation at –1.74% and urban at –1.90%. Vegetable prices plunged 20.7% yr/yr, pulses dropped 13.76%, and spices and meat also recorded year-on-year declines. Price increases for cereals, eggs, milk, and sugar eased notably.
Figure 1: India CPI and Repo Rate (%)
On the flip side, edible oils remained an outlier, surging 19.24%, their fastest pace since March 2022 and marking nine straight months of double-digit growth. Fruit inflation stayed elevated at 14.42%, the seventh consecutive month above 10%. Fuel inflation edged up to 2.67%.
Core inflation, excluding food and fuel, moderated to 4.1% from 4.4% in June, led by softer increases in transport, clothing, housing, and education. Rural headline inflation dropped to 1.18%—a record low—while urban inflation fell to 2.05%, its second-lowest on record.
Regionally, inflationary pressures varied sharply. Kerala posted the highest retail inflation at 8.89%, while Assam, Bihar, Odisha, and Telangana recorded outright deflation.
The latest print aligns with the RBI’s downwardly revised FY26 inflation forecast of 3.1%, with Q1FY26 inflation averaging 2.69%. The central bank expects inflation to average 2.1% in Q2 before gradually rising to 4.4% by Q4 as the favourable base effect fades.
From a policy standpoint, the benign inflation backdrop gives the RBI greater flexibility, though policymakers have signalled no rush to cut rates further after delivering 100bps of easing earlier in the year. Analysts see limited scope—perhaps 50bps—for additional cuts, contingent on how the global trade environment evolves, particularly with the risks posed by US tariffs and potential secondary sanctions on Russian oil.
For now, July’s CPI data provides both relief for consumers and breathing room for policymakers. But with base effects set to turn less favourable later this fiscal year, the focus will shift to whether food price stability can be maintained and if external shocks disrupt India’s disinflationary trend.