With the retail inflation hitting a new low for the last eight plus years, it settled at 1.54% in September as opposed to August’s 2.07%. This comes in considerably lower than the Reserve Bank of India (RBI) target range of 2-6% and represents the lowest rate recorded since June 2017. The gradual drop in prices of food going through out the country has been the major factor in this huge fall.
What’s driving the lower numbers
The food price story
Food corresponds to approximately half the Consumer Price Index, so any adjustment in food prices makes a big impact. Food inflation, which stood at 0.17% in August, has dipped substantially to -2.28% in September. This trend is quite evident if August is compared to September.
Particularly, vegetables can be considered a good example of this. Since April prices have been going down, and September has recorded a year-on-year decrease of 21.38% in comparison with the 15.92% drop in August. After the high prices last year, this long-term decline has really helped households to catch their breaths and spread out their monthly budgets.
City and countryside both benefit
Price cuts are not just for a particular area or group. Inflation in rural areas was measured at -2.17% while that of cities was -2.47%. Such an extensive pattern indicates that lower prices are helping families in all locations.
Energy and core prices
Besides, the decrease in the cost of energy has also contributed to the moderate pace of inflation, where the rate dropped to 1.98% in September from 2.43% in the previous month. On the other hand, the trend of core inflation is climbing by a small margin, mainly contributed by the increase in housing costs.
Government role
The government has announced several tax cuts that cover everything from soaps for daily use to cars. These GST reductions are designed to keep prices under control during the festival season from September to December. The market experts are of the view that the cuts are likely to force inflation to lower still, even below the 1% mark by October.
In addition to this, the domestic measures will make it easier to absorb the impact of the US tariffs of up to 50% on Indian exports.
What the central bank says
In its latest policy review, the Reserve Bank decided to hold off on rate hikes but conveyed that the current inflation scenario allows for the possibility of rate cuts aimed at supporting economic growth.
The RBI has adjusted its full-year inflation estimate for 2025-26 downwards from 3.1% to 2.6%. When broken down by quarters, they expect 1.8% for Q2 and Q3, 4% for Q4, and 4.5% for Q1 of 2026-27.
Governor Sanjay Malhotra highlighted the significant transformation in the inflation outlook as a result of falling food prices and tax changes. Financial market participants are convinced that now conditions are ripe for the RBI to lower rates by 25-50 basis points with the December 2025 meeting emerging as a likely candidate for a 25 basis point cut.
Indian consumers are benefiting directly as a result of this eight-year low retail inflation scenario. The significant decrease in the prices of food, especially of vegetables, has lightened the household budget burdens across the country. The overall price situation is quite positive at the moment when government tax relief is combined with it.
Though, experts remind us that the RBI has to strike a balance between supporting growth and ensuring price stability. The uncertainties surrounding global trade and the market dynamics of festival shopping will continue to affect inflation trends and policy decisions.
For the time being, however, this benign inflation scenario gives the central bankers the flexibility to manoeuvre and possibly still use the rate cuts to energize the economy in the coming months.
