Retail Inflation Plunges to Six-Year Low, RBI Eyes Possible Rate Cut Ahead of Festive Season
India’s retail inflation dropped to 3.12%, the lowest in six years. The RBI is now expected to consider a rate cut in September or October as food prices and core inflation remain stable.
NewsSutra
India’s retail inflation has touched a six-year low, with the Consumer Price Index (CPI) dropping to 3.12% in June 2025, sparking widespread speculation that the Reserve Bank of India (RBI) may announce a rate cut as early as the September or October monetary policy reviews. With food prices cooling and core inflation on a downward trend, the development comes as a critical signal in the government’s broader effort to balance inflation control with economic growth.
This unexpected disinflation opens a potential monetary window that could lower borrowing costs, boost consumer sentiment during the upcoming festive season, and lend momentum to private investment in an economy still recovering from last year’s global slowdown.
What the Data Shows
The June CPI inflation print of 3.12% marks a sharp deceleration from 3.66% in May 2025 and a significant drop from 5.58% a year ago. Notably, core inflation—which excludes volatile food and fuel items—has eased to 3.85%, its lowest since mid-2018. The food inflation component also fell to 1.18%, signaling strong supply-side stability.
| CPI Component | June 2024 | May 2025 | June 2025 |
|---|---|---|---|
| Headline CPI | 5.58% | 3.66% | 3.12% |
| Core Inflation | 6.12% | 4.08% | 3.85% |
| Food Inflation | 4.88% | 2.42% | 1.18% |
| Fuel & Light Inflation | 3.23% | 1.96% | 1.74% |
This consistent decline in headline and core CPI suggests that inflationary pressures, which once threatened to destabilize purchasing power, are now easing significantly across urban and rural households.
Why Inflation Is Falling
Several underlying factors are contributing to the sharp fall in inflation figures:
1. Stabilizing Food Prices
India’s rabi crop has delivered better-than-expected yields this year, helping to contain prices of cereals and pulses. Government releases from buffer stocks have also helped to regulate prices of essential commodities like wheat, rice, and sugar. Additionally, vegetable inflation—typically volatile—remained subdued due to early arrivals of Kharif vegetables in wholesale markets.
2. Low Crude Oil Prices
Global crude oil prices have stayed between USD 65–75 per barrel through the first half of 2025. This has kept petrol and diesel prices stable in India. Consequently, inflation in the fuel and light category is now below 2%, having steadily declined over the past three quarters.
3. Import Cost Relief
As global shipping rates and supply chain bottlenecks ease, the cost of importing key goods—such as electronics, chemicals, and pharmaceuticals—has dropped. This has had a trickle-down effect on manufactured products and retail goods, keeping inflation under check.
4. Base Effect
CPI data from mid-2024 was inflated due to extreme weather and food shortages, so the current low inflation is also a statistical reflection of that elevated base.
RBI’s Next Move: Will a Rate Cut Happen?
The RBI’s repo rate currently stands at 6.00%, unchanged for over a year. During its last policy meet, the central bank acknowledged the visible disinflation trend but remained cautious, citing weather risks and global uncertainty.
However, as headline inflation continues to undershoot the 4% medium-term target, a growing number of economists believe the central bank now has room to loosen monetary policy. With core inflation also inching closer to 3.5%, and external factors largely supportive, a 25 basis-point rate cut as early as September or October 2025 seems plausible.
Market pricing currently indicates a 60–70% probability of a cut in the RBI’s next review cycle. Such a move would not only be timely for the festive demand cycle, but could also offer relief to India’s struggling MSME and construction sectors.
Impact on Borrowers, Savers, and Consumers
If the RBI indeed moves to cut rates:
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Borrowers will benefit through lower lending rates on home loans, personal credit, and auto loans. This could trigger fresh demand in the housing and auto sectors.
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Savers, on the other hand, may see lower fixed deposit returns over time. However, with inflation now close to 3%, the real interest on savings still remains positive.
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Consumers across income groups will feel less pressure on daily essentials, improving household budgets and possibly spurring discretionary spending.
Sectoral Impact and Market Reaction
Banking & Real Estate
Public and private banks have already begun pricing in a rate cut. A lower cost of borrowing could boost credit growth, while real estate developers expect an uptick in home-buying during the festive period if EMIs drop.
Equity Markets
The Nifty and Sensex have remained steady but rate-sensitive sectors like FMCG, auto, and housing finance have shown strength, anticipating a policy shift.
Bond Markets
India’s benchmark 10-year bond yield slipped below 6.95% for the first time in five months after the inflation data release. Investors are anticipating a more dovish policy stance from the central bank.
What Analysts Are Saying
Leading economists and market experts are increasingly confident that the RBI will act soon:
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Madhavi Arora, Chief Economist, Emkay Global: “The June inflation print validates the view that India has entered a structurally soft inflation regime. A policy cut before Diwali would be well-timed.”
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Siddharth Prabhu, Rate Strategist, Kotak Mahindra Bank: “The RBI will move cautiously but has fewer reasons to wait. One cut in September or October could set the tone for a supportive fiscal second half.”
Risks to the Disinflation Trend
Despite the positive developments, risks remain:
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Weather Volatility: Monsoon patterns remain erratic in parts of Maharashtra, Gujarat, and eastern states. A deficient or delayed monsoon can disrupt Kharif sowing, potentially pushing up food prices.
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Global Crude Fluctuations: Any sudden increase in global crude prices due to geopolitical tensions could push fuel inflation back into higher territory.
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Currency Depreciation: If the rupee weakens significantly, import inflation could rise, especially for energy, fertilizers, and electronics.
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Festive Season Demand Spike: October to December typically sees a consumption surge. If supply chains are unprepared, prices of consumer durables and food could spike temporarily.
Policy and Government Response
The Ministry of Finance has welcomed the low CPI figures, viewing them as proof that the government’s targeted interventions—buffer stock releases, duty adjustments, and price monitoring cells—are paying off. Officials suggest that the current inflation levels provide headroom for the RBI to focus on growth, particularly for infrastructure and capex-focused lending.
Additionally, the low inflation environment is likely to support the government’s fiscal math. Subsidies on food and fuel are expected to be lower this year, giving more elbow room for welfare schemes ahead of upcoming state elections.
International Comparison
India’s disinflation trajectory aligns with several major emerging markets:
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Brazil recently saw CPI fall to 3.0%, while
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Indonesia recorded inflation at 2.6%, and
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South Korea dropped to 2.2%.
However, inflation in advanced economies like the U.S. and EU remains above their 2% targets. This makes India one of the few large economies with both monetary flexibility and political stability to act proactively.
Outlook: Entering a Low-Inflation Phase
Looking ahead, inflation is likely to remain in the 3.0–3.5% range till November, assuming no major weather shocks or global commodity spikes. With both core and food inflation well contained, the RBI could adopt a more accommodative policy stance in time for the peak festive consumption months.
For the Indian consumer, this marks a rare moment of price stability. For businesses and investors, it signals a supportive macroeconomic environment with scope for renewed growth.
