​Limited gains: on the inflation space

From having to deal with an inflation level higher than the RBI’s comfort band of 2%-6% just two years ago, the government is now in the relatively more comfortable space of inflation coming in lower than that band. July’s retail inflation of 1.55%, the lowest since June 2017, was made possible almost entirely by the contraction in food prices. This is particularly significant because the statistical base effect was low in July. That is, food inflation in July 2024 was itself at a 13-month low. A contraction in prices this July over that figure implies a real reduction in prices rather than a statistical anomaly. The consensus among economists is that this will continue due to improved sowing, a good monsoon, and a favourable base effect as inflation had surged again in the latter half of last year. The other positive was that core inflation, which removes the effect of fuel and food, fell to 4.1%, which is the RBI’s target. On balance, the outlook for inflation looks good, especially due to the monsoon’s progress. There is some risk, especially if India decides to switch away from Russian oil and opts for the somewhat more expensive Gulf oil. But this is unlikely given the government’s assertions that it will prioritise India’s interests. In any case, the Trump-Putin meet could potentially render the latest tariff obstacles inconsequential.

The RBI expects inflation to pick up only from January 2026. But there is no time for complacency. While India is far from being in a persistent low-inflation, low-growth stagnation, it is staring at a growth slowdown. The latest growth in the Index of Industrial Production was at a 10-month low, with capital and consumer goods activity anaemic. Growth in GST revenue slowed to single-digits in June and July. The contraction in gross direct tax collections this financial year is also concerning. Car sales to dealers dropped to an 18-month low in June. UPI transactions, touted in the past as a sign of buoyant economic activity, fell as compared to the previous month thrice so far in 2025. The RBI has retained its forecast of 6.5% growth this financial year, which looks optimistic. Even if the U.S.’s additional 25% tariffs are removed, the initial 25% will themselves likely reduce India’s growth by 0.2 percentage points. India’s growth is not robust enough for it to be blasé about such a loss. Structural problems remain, demand is still weak, and a temporary dip in inflation is in itself not going to help much.