The September 2025 retail inflation data, at a 99-month low of 1.54%, has important policy implications for the RBI in particular. Except for August, retail inflation has slowed in every month this financial year. The average rate of inflation for the first half of the fiscal is 2.2%, just within the RBI’s comfort band of 2%-6%. When inflation was at the higher end of this band, the RBI had repeatedly said that its target was 4%, and that it would not rest until inflation was at that level. There is an argument to be made for the central bank to strive for that same target now that inflation is repeatedly coming in below that mark. Consistently low inflation means that supply is comfortably outstripping demand. Inflation in the clothing and footwear category, for example, was at 2.3% in September 2025, and has been falling pretty consistently for the last two years. This is not a good place to be in, especially now. Faced with the same oversupply problem, albeit at a much larger scale, China is increasingly depending on demand from abroad to absorb its supply. This has not exactly been India’s forte historically, and the current tariff tensions affect exports. The government has tried to stimulate domestic demand through income-tax and GST rate reductions. Households have been using the direct tax rebate to bolster their savings and reduce debt rather than increase consumption. GST rate cuts also led to only a temporary spurt in purchases.
What is needed is a sustained increase in real wages, and for that the private sector needs to step up. It is good news that private sector investment announcements grew strongly in the first half of this year, but those need to translate into real projects on the ground soon. One way that the RBI can help is to cut interest rates significantly in the next Monetary Policy Committee meeting in December. With inflation so low and private investment needing a boost, it is better to err on the side of accommodation than conservatism. The other policy issue the RBI needs to deal with is the inaccuracy of its forecasts. In April, it had predicted that inflation for the year would be 4%. Later, it consistently revised this forecast, arriving at 2.6% at the latest meeting in end-September. While factors influencing inflation are dynamic, such a drastic revision of the forecast in just six months shows that something is wrong with the RBI’s estimation process. Since a key aspect of its work is with inflation prediction, this is a deficiency that it should address quickly.
Published – October 15, 2025 12:10 am IST
