India’s retail inflation dropped sharply to 1.55% in July 2025, the lowest year-on-year rate since June 2017. This is also the first time in over six years that inflation has fallen below the Reserve Bank of India’s (RBI) 2%–6% tolerance band.
The July figure marks a significant decline from 3.16% in April 2025 and 3.54% in July 2024, according to official government data released on Tuesday, August 12.
Food Prices Lead the Decline
The steep drop in inflation is primarily due to cooling food prices, which account for nearly 50% of the Consumer Price Index (CPI) basket.
- Food inflation stood at -1.76% in July, compared to -1.06% in June.
- A strong spring harvest, despite uneven monsoons, has helped keep food prices in check.
- This trend extends India’s longest disinflationary streak in more than a decade.
A Reuters poll of 50 economists had predicted retail inflation at 1.76%, but the actual figure came in even lower.
RBI’s Monetary Policy Stance
Last week, the RBI’s Monetary Policy Committee (MPC) left the repo rate unchanged at 5.50% after three consecutive cuts since February 2025, totalling 100 basis points.
The MPC noted that the inflation outlook is now “more benign”, giving the RBI more room to support economic growth. The central bank also retained its neutral stance.
However, the RBI cautioned that inflation may rise in the last quarter of FY26 due to volatile food prices, especially vegetables.
Full-Year and Quarterly Inflation Projections
The RBI has revised its FY26 headline inflation forecast to 3.1%, down from 3.7% projected in June.
Quarterly CPI estimates:
- Q2 FY26: 2.1%
- Q3 FY26: 3.1%
- Q4 FY26: 4.4%
- Q1 FY27: 4.9% (above RBI’s 4% target)
The RBI stated that risks to the inflation outlook remain “evenly balanced”.
Sectoral Price Trends
While food prices cooled, the fuel and light category saw inflation rise slightly to 2.67% in July from 2.55% in June. Core inflation (excluding food and fuel) remained steady at 4%.
Economic Context
The fall in inflation comes amid geopolitical uncertainty and trade pressures, including higher tariffs on Indian goods imposed by U.S. President Donald Trump.
With inflation under control, the RBI may have greater flexibility to use monetary policy to stimulate the economy in the coming months.