The low-inflation tailwind

It provides policymakers with much-needed room to counter any global shocks

- Sonal Varma

India's inflation has entered a new phase. After six years of battling above-target inflation, through the pandemic, wars and food price shocks, headline inflation finally appears set to sustainably undershoot the Reserve Bank of India's (RBI's) midpoint target of 4 per cent in 2025-26. If this disinflationary trajectory holds, the scope for monetary policy to support growth would be much greater than most expect.

Why sub-4 per cent inflation is here to stay

While a sustained period of sub-4 per cent inflation sounds ambitious, we see multiple favourable demand- and supply-side factors.

First, the starting point is benign. Headline inflation has dropped below 4 per cent, partly due to vegetable prices; but even excluding these, Consumer Price Index (CPI) inflation has averaged a low 3.6 per cent over the last year.

Underlying inflation remains benign too. Our measure of 20 per cent trimmed mean CPI inflation, which excludes outliers with the highest and lowest inflation rates, fell below 4 per cent back in January 2024, and was just 3.3 per cent this April. The RBI's measure of core inflation has drifted above 4 per cent, but this was mainly due to higher gold prices. Excluding commodities from the core basket, the three-month seasonally adjusted annualised rate stood at just 3.5 per cent.