The extraordinary CPI print of 2025 revealed both the maturity of India’s macro framework and the fragility of a food-driven disinflation
Part 1 of a three-part series on India’s economic transformation in FY26.
India has long treated inflation as a fact of economic structure, geography, and demography — the price of feeding 1.4 billion people across a landmass susceptible to the monsoon, fragmented supply chains, and the electoral arithmetic of minimum support prices. When the data for calendar year 2025 arrived, it seemed a lot like a category error. The average headline CPI between April and December ran at 1.7 percent. In October, it hit 0.25 percent — a figure without precedent in the index's history since the 2012 base. This happened in an economy that simultaneously grew at 7.4 percent in real terms, the fastest clip of any major economy. The juxtaposition demands explanation: was this a structural breakthrough, or a cyclical accident dressed up as one?
Figure 1: Inflation in India Over the Last Decade
Source: MOSPI
Food and beverages account for 46 percent of India’s consumer price basket, rendering the index acutely vulnerable to harvest outcomes, vegetable gluts, and the politics of minimum support prices. Between 2012 and 2024, food inflation averaged 5 percent a year. Headline CPI repeatedly breached the upper tolerance band of 6 percent. The formal inflation-targeting framework itself, adopted in 2016 on the recommendation of the Urjit Patel committee, was an institutional response to a period in which real interest rates had turned deeply negative, and price signals had become unreliable. As recently as fiscal year 2024–25, food inflation ran at 7.3 percent, driven by vegetables and pulses; headline CPI averaged 4.6 percent. Against that backdrop, a single-digit number below 2 percent was, among large emerging markets, an outlier of the first order. Despite milder inflation in other nations, India’s deviation from its own historical norm was the most dramatic of the group.
Figure 2: Inflation in 2025 in Select Countries
Source: IMF
Scrutiny beyond the headline reveals a lopsided structure of disinflation. Consumer food prices turned negative in June and stayed there for seven consecutive months, plunging to minus 5 percent by October — the deepest food deflation in the history of the series. Vegetable prices fell 22 percent year-on-year in November; pulses dropped 16 percent. The drivers were identifiable: a favourable southwest monsoon during the first half of FY26, bumper kharif and rabi harvests that corrected the vegetable and pulse spikes of 2024. Further, the government’s calibrated use of buffer stocks and trade policy — lifting export restrictions on non-basmati rice, adjusting edible oil tariffs, and global softness in crude and commodity prices eased input costs.
Exclude food from India’s CPI basket, and the country’s inflation looked much like any other large emerging market. The “impossible number” was made possible by a specific, heavily weighted, and potentially reversible set of conditions in a single category. That is not a trivial observation.
But here is the analytical crux. Core inflation — the residual once food and fuel are stripped out — told a far less dramatic story. Housing held at roughly 3 percent throughout the year. Health and education costs rose by 3.4-3.6 percent. The miscellaneous group, a reasonable proxy for services inflation, ran above 4 percent for most of the period, with personal care surging into double digits at several points. Exclude food from India’s CPI basket, and the country’s inflation looked much like any other large emerging market. The “impossible number” was made possible by a specific, heavily weighted, and potentially reversible set of conditions in a single category. That is not a trivial observation.
Figure 3: Trends in Components of CPI
Source: MOSPI
The Reserve Bank recognised the window and moved through it with conviction. Between February and December 2025, the Monetary Policy Committee cut the policy repo rate by a cumulative 125 basis points — from 6.5 percent to 5.25 percent — the sharpest easing cycle since the pandemic emergency of 2020. The February cut was itself a milestone: the first reduction in nearly five years, ending a prolonged hold that had stretched through the post-pandemic tightening. A supersized 50-basis-point move in June signalled the shift from data-dependence to directional commitment. By December, the RBI was also injecting liquidity through ₹1 lakh crore in government bond purchases and a US$5 billion forex swap.
The RBI was easing at pace while the Federal Reserve held its nerve and the ECB moved only cautiously — a policy divergence premised on India’s domestic conditions. The bet paid off in terms of growth, though it widened interest rate differentials and contributed to the rupee’s slide past INR 90 per US dollar.
The transmission was tangible. Average lending rates on fresh bank loans fell roughly 60 basis points. Credit growth held at double digits. Private consumption expanded 7 percent to reach 61.5 percent of GDP — its highest share since 2012 — underpinned by rising real incomes and a rural recovery. Gross fixed capital formation grew 7.8 percent, indicating that cheaper money was reaching the investment cycle, not merely reflating consumption. The RBI was easing at pace while the Federal Reserve held its nerve and the ECB moved only cautiously — a policy divergence premised on India’s domestic conditions. The bet paid off in terms of growth, though it widened interest rate differentials and contributed to the rupee’s slide past INR 90 per US dollar.
This monetary confidence did not emerge in a vacuum. It was underpinned by parallel fiscal consolidation, which lent credibility to the broader macro framework. The central deficit narrowed to 4.4 percent of GDP in FY26, down from a pandemic peak of 9.2 percent; revenue receipts improved to 9.1 percent of GDP as tax buoyancy and formalisation widened the base. External validation arrived in quick succession: Morningstar DBRS upgraded India to BBB in May, S&P Global followed in August — the first upgrade in 18 years, moving India off the lowest investment-grade rung — and Japan’s R&I raised its rating to BBB+ in September. S&P’s rationale cited economic resilience and an enhanced monetary environment that anchored inflationary expectations. Three upgrades in five months is unusual for any sovereign; for one to simultaneously navigate a 50 percent US tariff, a military crisis with a nuclear neighbour, and record foreign portfolio outflows, it was remarkable.
Three upgrades in five months is unusual for any sovereign; for one to simultaneously navigate a 50 percent US tariff, a military crisis with a nuclear neighbour, and record foreign portfolio outflows, it was remarkable.
The RBI projects inflation reverting to around 4.6 percent by FY27. The IMF concurs: 2.8 percent for FY26, 4 percent the year after. Both forecasts embed a return to normality — and, in India’s case, normality means food price volatility driven by weather, global energy costs, and the institutional incompleteness of agricultural reform. The cold-chain infrastructure that would smooth seasonal vegetable spikes remains patchy. Procurement pricing continues to carry a political premium. A single deficient monsoon could reverse much of 2025’s benign arithmetic. A broader reform agenda that includes climate-proofing agricultural supply chains, modernising cold storage and logistics, and rationalising procurement would make low inflation structurally durable rather than seasonally contingent. Although that agenda exists on paper, its political economy is the binding constraint.
Events have already begun to test India’s resilience. The Iran war in early March 2026 and the effective closure of the Strait of Hormuz sent Brent crude surging past US$120 a barrel — a 50 percent spike in under a week. India imports 85 percent of its crude, and roughly half its shipments transit Hormuz. The benign fuel inflation readings of 2025, running at 2–3 percent, do not reflect the new normal, but rather a window that has shut.
What 2025 established was the capacity of India’s macro institutions — a decade-old targeting framework, a credible central bank, and a fiscally consolidating government — to deliver under favourable conditions.
There is also the question that aggregate consumption data does not fully answer. Rural headline CPI turned negative in October, with food deflation in villages running at nearly 5 percent. While rural demand did recover, the depth of deflation raised a possibility that policymakers were reluctant to foreground: that part of the ultra-low number reflected not merely abundant supply but subdued purchasing power in pockets of the agrarian economy. India’s new CPI series, rebased to 2024 and first published in February 2026, will eventually offer a sharper lens — but its inaugural reading of 2.75 percent for January already signalled a reversion toward more familiar terrain.
What 2025 established was the capacity of India’s macro institutions — a decade-old targeting framework, a credible central bank, and a fiscally consolidating government — to deliver under favourable conditions. The harder question, and the one that will define the next chapter, is whether those institutions can hold the line when conditions turn.
Arya Roy Bardhan is a Junior Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation.
Part 2 examines how India navigated tariff shocks, oil volatility, and the limits of currency depreciation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Arya Roy Bardhan is a Junior Fellow at the Centre for New Economic Diplomacy, Observer Research Foundation. His research interests lie in the fields of ...
Read More +
 (1).jpg)
PREV