Lower-than-Expected Consumer Inflation
India’s consumer inflation slowed to 2.82% in May, lower than the 3% increase expected by analysts in a Reuters poll. This marks the lowest inflation rate since February 2019, according to the Ministry of Statistics and Programme Implementation. In comparison, inflation had risen by 3.16% in April, signaling a cooling of price pressures in the economy.
Food and Vegetable Inflation Drops
Food inflation, a key component of the overall index, also eased to 0.99% in May, significantly lower than the 1.78% recorded in April. Notably, vegetable prices decreased by 13.7%, while cereal prices grew by 4.77%, contributing to the moderation in overall food inflation. This decline in food prices is seen as a crucial factor in easing consumer inflation.
RBI Cuts Interest Rates Amid Easing Inflation
In response to the easing inflationary pressures, the Reserve Bank of India (RBI) recently reduced its benchmark repo rate by 50 basis points to 5.50%, the lowest level since August 2022. This marks the third consecutive rate cut since February, highlighting the RBI’s shift toward fostering economic growth in a challenging global environment. RBI Governor Sanjay Malhotra attributed the rate cut to both the softening inflation and weaker-than-expected growth prospects.
Growth Outlook and Economic Forecast
Despite the easing inflation, India’s economy expanded at a faster-than-expected annual growth rate of 7.4% in the quarter ending March, surpassing economists’ estimates of 6.7%. For the full fiscal year 2025, the economy grew by 6.5%, in line with government estimates. The RBI has maintained its growth projection of 6.5% for the current fiscal year ending in March 2026. Analysts at Nomura expect inflation to remain subdued at 3.3% for fiscal year 2026, slightly below the RBI’s 3.7% target.
Trade Negotiations with the U.S.
India is also facing the potential imposition of a 26% tariff on its goods and has been in negotiations with the U.S. to secure a deal before the July deadline. Reports suggest that Indian and U.S. trade negotiators are close to finalizing an “interim” bilateral trade deal, which would focus on market access for industrial and agricultural goods, lower tariffs, and the reduction of non-tariff barriers.
