A temporary blip in inflation will help, but not by much
Inflation has cooled a little, but the improvement is small and fragile. Prices are not racing the way they were a year ago, yet most households still feel the pinch at the market. Food items especially vegetables, pulses, milk, and spices continue to cost more than they should. Fuel and transport charges have also eased only slowly. In short: the headline number looks better, but the everyday experience has not changed much.
Why are the gains limited? First, food inflation is sticky. Weather shocks, higher input costs for farmers, and supply bottlenecks keep pushing up prices. When tomatoes or onions spike, the average family notices immediately, even if other items are stable. Second, global factors haven’t fully settled. Shipping costs and crude oil prices can rise again with any geopolitical flare-up, and that quickly feeds into transport and fertilizer costs at home. Third, services from rent to healthcare see prices adjust more slowly downward than upward. Once raised, they rarely fall back.
For policy makers, this creates a difficult balance. The central bank prefers to keep interest rates high enough to prevent price pressures from returning. But high rates also slow growth and make borrowing costlier for businesses and home buyers. Cutting rates too early could reignite inflation; cutting them too late could choke the recovery. The wise path is patience: wait for consistent evidence that food inflation is easing and that core inflation (prices excluding food and fuel) is on a steady downward path. 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.
Households need relief that lasts. One-time price controls and sudden export bans can give temporary comfort but damage farmer incentives and market confidence. A steadier approach—predictable trade policy, stable taxes on fuel, and investment in cold chains and rural roads—does more to keep prices in check over time.
Businesses also have a role. When input costs fall, companies should pass on the benefit instead of holding prices too high for too long. Competitive markets and vigilant regulators can help ensure that consumers see genuine discounts when conditions improve.