India’s retail inflation eased sharply in July 2025 to 1.55%, marking the lowest level in eight years and staying well below the Reserve Bank of India’s (RBI) target range of 2-4% for the fifth consecutive month. This is the weakest price rise since June 2017, reflecting a rare period of prolonged low inflation.

The primary driver behind this record low was a steep decline in food prices, which fell by 1.76%, their biggest drop since at least January 2019. The fall in food prices was more pronounced in urban areas compared to rural regions, largely due to strong monsoon rains that boosted farm output and improved supply availability.

While this trend offers relief to consumers and supports a growth-friendly monetary policy stance, it has also raised concerns about lower farm incomes. Steadily declining food prices can weigh on rural earnings, potentially impacting rural demand in the long term.

Earlier in August, the RBI acknowledged that headline inflation had come in lower than projected, citing volatility in food prices—particularly vegetables—as a key factor. Economists believe food inflation will likely remain subdued in the near term, supported by good monsoon progress, ample reservoir levels, and robust Kharif sowing, which are expected to sustain agricultural output and keep prices stable.

The July CPI data comes shortly after the RBI’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 5.5% in its bi-monthly review. The central bank has maintained its GDP growth forecast for FY26 at 6.5%, but revised its inflation projection for the year down from 3.7% to 3.1%.

Given the significantly lower-than-expected inflation, some economists see an increased likelihood of a rate cut in upcoming policy reviews. Lower interest rates could provide a boost to interest-sensitive sectors such as housing, automobiles, and consumer durables, while also improving household purchasing power, particularly for lower-income groups.

In terms of core inflation—which excludes volatile items such as food and energy—July saw a stable reading of 4.1%, indicating that demand-side pressures in the economy remain steady.

Overall, this benign inflationary trend is seen as favourable for a sustainable improvement in consumption demand, strengthening the case for further monetary policy easing and providing a positive backdrop for economic growth in the second half of FY26.

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