India’s Inflation Cools to 2.82% in May, Easing Policy Path for RBI
Food prices slide sharply as headline CPI hits lowest level since 2019
India’s headline inflation eased to a surprising 2.82% in May 2025, dropping below analysts’ expectations and hitting its lowest rate since February 2019, according to the Ministry of Statistics and Programme Implementation. This sharp cooling of price pressures has provided more flexibility for the Reserve Bank of India (RBI) to support growth through interest rate cuts.
Food Prices Lead the Decline
A significant factor behind the decline in inflation was the sharp moderation in food prices:
- Food inflation fell to 0.99%, down from 1.78% in April.
- Vegetable prices dropped by 13.7%, while cereal prices rose by a modest 4.77%, reflecting a more balanced food basket.
The decline in food inflation played a key role in driving overall consumer price index (CPI) lower, undercutting the Reuters median forecast of 3% CPI growth.
RBI Cuts Rates Amid Easing Inflation
In response to this disinflationary trend, the RBI cut its benchmark repo rate by 50 basis points to 5.50%, the lowest since August 2022.
- This marks the third consecutive rate cut since February 2025.
- RBI Governor Sanjay Malhotra cited the combination of soft inflation and underwhelming global growth as key reasons for the central bank’s dovish stance.
Outlook: More Easing Ahead?
Nomura economists forecast that inflation will remain subdued, averaging 3.3% for FY2026, below the RBI’s 3.7% target.
- They anticipate two more rate cuts of 25 basis points each in October and December, lowering the terminal repo rate to 5%.
- The fall in global commodity prices and influx of low-cost Chinese imports are expected to keep inflation in check.
Economic Growth Still Solid
Despite easing prices, India’s economy remains resilient:
- Q4 FY2025 GDP grew 7.4%, beating the 6.7% Reuters poll estimate.
- Full-year FY2025 growth stood at 6.5%, matching official projections.
- The RBI has maintained its 6.5% growth forecast for the fiscal year ending March 2026.
Trade Talks with U.S. Continue
India is also navigating trade uncertainties, including the risk of a 26% U.S. tariff on its exports.
- Indian and U.S. negotiators are nearing an “interim” bilateral trade deal, which may address market access for industrial and agricultural goods, lower tariffs, and reduce non-tariff barriers.
- The goal is to finalize this agreement before a July deadline, which could provide relief for exporters.
Bottom Line
With inflation cooling and growth steady, India appears to be entering a policy sweet spot. The RBI now has room to prioritize growth, and lower borrowing costs could support investment and consumption in the coming quarters. However, global headwinds and trade tensions remain key variables to watch.