UPSC Editorial Analysis: India’s Record-Low Inflation in September 2025

*General Studies-3; Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.*

Introduction

• India’s headline retail inflation (CPI-based) fell sharply to 1.5% in September 2025, the lowest since June 2017 — a span of 99 months.

• This marks only the second instance in FY 2025–26 when inflation fell below the RBI’s comfort band of 2–6%.

• The decline was largely due to deflation in food prices, which outweighed the rise in global crude oil and gold prices.

• Yet, the persistence of core inflation above 4% for eight consecutive months signals that underlying price pressures still exist.

• The situation poses both relief for consumers and a challenge for monetary policymakers.

Understanding the Key Terms

• Headline Inflation (CPI) – Measures overall price rise in a consumer basket including food, fuel, and other goods and services.

• Core Inflation – Excludes volatile items such as food and fuel to capture persistent price pressures in non-volatile goods and services.

• Super-Core Inflation – Excludes housing and other transitory components, giving a more refined view of underlying inflation trends.

• Base Effect – A statistical phenomenon where inflation appears low because the previous year’s prices were abnormally high.

• Comfort Zone (RBI) – The Reserve Bank of India targets inflation between 2% and 6%, with 4% as the midpoint for price stability.

Why Did Inflation Decline So Sharply?

• Food Deflation as the Key Driver

• Prices of vegetables fell by 21%, while pulses declined by 15% year-on-year. The Consumer Food Price Index (CFPI) recorded a fall of over 2%, which significantly reduced headline inflation. The fall is attributed to better monsoon distribution, bumper harvests, and improved rural supply chains. Government efforts like buffer stock releases, export curbs on onions, and targeted subsidies helped stabilize food prices.

• Prices of vegetables fell by 21%, while pulses declined by 15% year-on-year.

• The Consumer Food Price Index (CFPI) recorded a fall of over 2%, which significantly reduced headline inflation.

• The fall is attributed to better monsoon distribution, bumper harvests, and improved rural supply chains.

• Government efforts like buffer stock releases, export curbs on onions, and targeted subsidies helped stabilize food prices.

• Favourable Base Effect

• Food inflation in September 2024 had surged due to erratic rainfall and supply bottlenecks. This created a high base, making the 2025 year-on-year comparison look more deflationary. The base effect contributed to nearly half of the 1.5% drop in the overall inflation figure.

• Food inflation in September 2024 had surged due to erratic rainfall and supply bottlenecks.

• This created a high base, making the 2025 year-on-year comparison look more deflationary.

• The base effect contributed to nearly half of the 1.5% drop in the overall inflation figure.

• GST Rationalisation and Tax Cuts

• From September 22, 2025, the GST Council reduced tax rates on several essential goods. These cuts helped in lowering consumer prices and reinforced the downward trend in CPI. Analysts project that the full impact of GST reduction will be visible from October onwards.

• From September 22, 2025, the GST Council reduced tax rates on several essential goods.

• These cuts helped in lowering consumer prices and reinforced the downward trend in CPI.

• Analysts project that the full impact of GST reduction will be visible from October onwards.

• Rural vs Urban Divergence

• Rural inflation was lower than urban inflation, mainly because rural households spend a higher share on food, which saw deflation. This also suggests improved rural supply chain efficiency and reduced logistics costs.

• Rural inflation was lower than urban inflation, mainly because rural households spend a higher share on food, which saw deflation.

• This also suggests improved rural supply chain efficiency and reduced logistics costs.

• Stable Crude Oil Pass-Through

• Even though global crude oil prices rose by 18%, domestic price transmission was limited due to excise duty cuts and exchange rate stability. Hence, fuel inflation contributed minimally to overall CPI.

• Even though global crude oil prices rose by 18%, domestic price transmission was limited due to excise duty cuts and exchange rate stability.

• Hence, fuel inflation contributed minimally to overall CPI.

The Surprise Element – Rise in Core Inflation

• Persistent Core Inflation

• Core inflation (excluding food, beverages, fuel, and light) rose from 4.2% in August to 4.6% in September 2025. It has stayed above 4% for eight consecutive months, indicating sustained demand-side pressures.

• Core inflation (excluding food, beverages, fuel, and light) rose from 4.2% in August to 4.6% in September 2025.

• It has stayed above 4% for eight consecutive months, indicating sustained demand-side pressures.

• Gold and Housing Inflation

• Gold prices surged by over 45% year-on-year, largely due to global safe-haven demand amid economic uncertainty. Housing costs also increased, particularly in urban centers, due to rising construction costs and higher rentals.

• Gold prices surged by over 45% year-on-year, largely due to global safe-haven demand amid economic uncertainty.

• Housing costs also increased, particularly in urban centers, due to rising construction costs and higher rentals.

• Even Excluding Gold, Core Inflation Rose

• Analysts from ICICI Securities found that even after excluding gold, core inflation increased from 3.2% to 3.7%. This shows broader inflationary pressures across services like education, healthcare, and recreation.

• Analysts from ICICI Securities found that even after excluding gold, core inflation increased from 3.2% to 3.7%.

• This shows broader inflationary pressures across services like education, healthcare, and recreation.

• Super-Core Inflation

• The super-core inflation (excluding food, fuel, gold, and housing) accelerated from 3.3% to 3.9%. It captures the deeper and more persistent demand-side pressures in the economy.

• The super-core inflation (excluding food, fuel, gold, and housing) accelerated from 3.3% to 3.9%.

• It captures the deeper and more persistent demand-side pressures in the economy.

Broader Economic Impact

• Relief for Consumers

• Lower food prices increase real household income, improving purchasing power, especially for rural and low-income families.

• Boost for Growth

• Lower inflation allows cheaper borrowing costs, potentially reviving investment and consumption demand.

• Sectoral Implications

• Agri sector: May face reduced farm incomes due to food deflation, calling for MSP and procurement support. Real estate: Rising housing inflation shows revival of urban demand but also cost pressures in construction materials. Financial markets: Bond yields eased, anticipating future RBI rate cuts.

• Agri sector: May face reduced farm incomes due to food deflation, calling for MSP and procurement support.

• Real estate: Rising housing inflation shows revival of urban demand but also cost pressures in construction materials.

• Financial markets: Bond yields eased, anticipating future RBI rate cuts.

Global and External Risks

• Geopolitical tensions (Ukraine, West Asia) could push up global commodity and energy prices.

• U.S. Federal Reserve’s rate stance and global monetary tightening may affect the rupee.

• Trade disruptions or tariff-related uncertainty, including U.S. tariffs under the Trump administration, may disturb global price stability.

• Climate-related shocks like El Niño could reverse food deflation trends.

Challenges Ahead

• Food Price Volatility: Despite the present fall, erratic rainfall or crop failure could quickly push prices up again.

• Sticky Core Inflation: Persistent price rise in non-food sectors suggests structural inefficiencies.

• Statistical Base Effect: The current low rate might partly be an illusion caused by a high base year.

• Demand Revival: If aggregate demand rises faster than supply recovery, inflation could return.

• Fiscal Risks: Excessive government borrowing or deficit financing could stoke inflationary pressures.

Outlook for the Coming Months

• October 2025 inflation is expected to “flatline” at around 0.2% year-on-year, as per preliminary estimates.

• Headline inflation is likely to undershoot RBI’s projection for Q3 FY26.

• However, core inflation near 4.5% remains a policy concern.

• Analysts expect inflation to stabilize around 3–4% by March 2026, provided no global supply shock occurs.

Way Forward

• Maintain Vigilance: RBI and government must continuously monitor both headline and core components.

• Strengthen Supply Chains: Investment in logistics, storage, and agri-infrastructure to prevent food price volatility.

• Improve Data Transparency: Real-time CPI data and disaggregated core indices can aid better policy calibration.

• Fiscal Discipline: Avoid populist spending and maintain FRBM targets to prevent demand-pull inflation.

• Diversify Imports: Reduce vulnerability to global commodity shocks through energy diversification and strategic reserves.

• Communication Strategy: RBI should communicate clearly to anchor inflation expectations among consumers and markets.

Conclusion

• The record-low inflation print of 1.5% in September 2025 offers short-term comfort but long-term caution.

• The data underscores India’s complex inflation dynamics — where supply shocks, demand revival, and global volatility constantly interact.

• The challenge for policymakers is to balance growth with stability, ensuring that temporary disinflation does not lead to complacency.

Explain the concept of core inflation and assess its importance for monetary policy formulation in India. (250 Words)