India Inflation Slides to 1.54%, Below Target for the Second Time in 2025

India’s inflation dropped to 1.54% in September 2025, marking an eight-year low and reinforcing expectations that the Reserve Bank of India (RBI) may cut interest rates in the coming months. The reading is the second time this year that consumer price growth has fallen below the central bank’s 2%-6% target range. With food prices in deflation and the impact of a recent goods and services tax (GST) rationalization, the disinflationary trend is likely to persist, easing pressure on policymakers to prioritize price stability over growth.

Inflation data is a critical barometer for monetary policy in India, influencing rate decisions, investment sentiment, and the balance between economic growth and price stability. The current environment is shaped by a combination of favorable agricultural conditions, policy reforms, and shifting global trade dynamics. As the RBI weighs its next move, the market is increasingly betting on a rate cut to stimulate economic activity amid high US tariffs on Indian goods and slowing export momentum.

Introduction

The Consumer Price Index (CPI) in India fell to 1.54% in September 2025, the lowest level since June 2017 and below the RBI’s target range. This decline is attributed to deflation in the food basket, strong monsoon rains improving agricultural output, and a recent tax overhaul that lowered the prices of everyday goods. The data highlights a broader trend of disinflation, which has implications for monetary policy, economic growth, and market dynamics.

The Indian economy, which grew at 7.8% in the three months to June, faces headwinds from 50% US tariffs on Indian goods. The combination of low inflation and external pressures creates a favorable environment for easing monetary policy to support growth. Analysts and central bankers are closely watching how the disinflationary trend interacts with fiscal and trade policies in the coming months.

Data Overview and Context

India’s CPI measures the average change in prices paid by consumers for a basket of goods and services. The index is a key indicator for the RBI in setting interest rates and managing inflation expectations. The September 2025 reading of 1.54% is the second time this year that the index has fallen below the RBI’s target range. Below is a summary of key data points:

| Month | CPI Inflation (%) | 2025 Average Forecast | 2024 Average |
|-------|-------------------|------------------------|--------------|
| September 2025 | 1.54 | 2.6 | 4.2 |
| August 2025 | 2.07 | - | - |
| July 2025 | 2.45 | - | - |
| June 2025 | 2.55 | - | - |

The data is sourced from the Ministry of Statistics and Programme Implementation in India. A key limitation is that the CPI does not fully reflect inflation in services, which are a growing part of the economy. Additionally, the index may not capture the full impact of regional price variations or changes in consumer behavior.

Analysis of Underlying Drivers and Implications

The primary drivers of the recent disinflation are favorable agricultural conditions and policy reforms. The monsoon season, which is critical for India’s agrarian economy, performed well in 2025, boosting output and driving down food prices. The food basket in the CPI fell into deflation in September, with vegetables and pulses recording multi-year lows. This has had a significant downward effect on overall inflation.

Another key factor is the GST rationalization introduced in September 2025. The tax overhaul lowered the prices of everyday items, contributing to the softening of inflation. Analysts estimate that this reform could reduce inflation by at least 14% in the coming months.

Global trade tensions also play a role. India’s exports to the US have declined due to high tariffs, but demand from the EU and Southeast Asia has offset some of the losses. This diversification of trade partners has helped maintain economic growth despite external headwinds.

Looking ahead, the disinflationary trend is expected to continue, with the RBI forecasting an average CPI of 2.6% for fiscal year 2026. This would leave room for further rate cuts, provided the economy maintains its growth trajectory and external conditions remain stable.

Policy Implications for the Reserve Bank of India

The RBI has already cut interest rates by 100 basis points since the beginning of 2025, signaling a shift toward accommodative policy. With inflation well below the 4% medium-term target, the central bank is likely to continue its easing cycle. A 25 basis point rate cut in the December meeting is widely anticipated, subject to further transmission of previous rate cuts to credit markets and the impact of the GST reform