Retail inflation cools to an over eight-year low of 1.54% in September, but core inflation surges

NEW DELHI: India’s retail inflation cooled to 1.54% in September from 2.07% the previous month, marking the lowest reading since June 2017, due to the statistical effect of a favourable base and driven by lower prices of vegetables and pulses. Core inflation, on the other hand, shot up to a two-year high of 4.43% due to a sharp surge in prices of gold and silver ahead of the festive season.

This is broadly in line with the economists’ projection of 1.5% in a Mint poll. With this, inflation has slipped below the lower tolerance limit of the Reserve Bank of India’s (RBI’s) 2-6% target band for the second time in three months. However, since this is largely driven by the base effect, it is unlikely to be a cause for concern.

In September 2024, food inflation had jumped to 9.2% from 5.7% the previous month, creating a favourable base this year.

As such, food inflation declined to (-)2.28% in September from (-)0.64% in August. Apart from the base effect, the fall in prices of vegetables and pulses helped pull headline inflation down. Food makes up nearly 40% of the inflation basket and has a heavy influence on the headline inflation.

Vegetables witnessed the lowest inflation in four years at (-)21.38% in September, compared to (-)15.92% decline in the previous month. Similarly, pulses and products witnessed inflation at (-)15.32% as against (-)14.53% in August. Besides these two, other food items such as cereals, milk, fruits, egg, and oils and fats, witnessed a slower pace of rise in September, partly driven by base effect.

“Of the 23 major groups, 17 saw a decrease in their inflation rates in September 2025 compared to the previous month—the most significant drop since April 2024—indicating a broader benign inflationary trend across the consumption basket,” said Paras Jasrai, associate director and economist at India Ratings and Research.

While much of the decline has come from food items, several items in the core category witnessed increased price pressures, led by gold and silver, which witnessed 46.87% and 41.75% inflation rates, respectively, in September. Housing inflation also increased to 3.98% in September from 3.09% the previous month. The core category excludes the impact of food, fuel and light groups.

The latest print has taken the average for July-September to 1.74%, broadly in line with the RBI’s latest projection of 1.8% for the quarter. The central bank’s monetary policy committee (MPC) earlier this month sharply revised down its projections as inflation undershot its expectations in earlier months.

Moreover, benign food prices and the impact of goods and services tax (GST) cuts are expected to exert downward pressure on prices. Inflation in the current quarter is also expected to be below 2% limit, at 1.8%, before rising to 4% in the last quarter on the base effect turning unfavourable.

“We expect the pass-through of the GST cut to be more visible in the upcoming October reading,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, adding that inflation may decline further.

With inflation expected to remain benign for a few months, economists expect the RBI to deliver a rate cut in December. “Overall, the benign inflation and growth trajectory does provide room for 25-50bp rate cuts,” Bhardwaj added.

Madhavi Arora, chief economist at Emkay Global, also sees scope for a rate cut in December. “Macro resets in the form of consistent inflation undershoots, down-trending core inflation, followed by weaker sequential demand in the second half and sub-8% estimated nominal GDP growth in FY26 call for front-loaded rather than back-loaded policy support,” Arora said. “The timing and magnitude of rate cuts ahead will therefore be critical,” she added.

The MPC, in its policy meeting earlier this month, left the repo rate unchanged at 5.5%, acknowledging a low inflation trajectory and noting that the impact of the earlier front-loading of rate cuts, a cumulative 100 basis points, was still playing out. Considering the ongoing trade-related uncertainties and their impact, the MPC said it was “prudent to wait” for “greater clarity to emerge” before taking action.

“A final 25 bps rate cut is possible in December 2025, with its timing contingent on the degree of further transmission of the cumulative 100 bps rate cuts to the credit market, as well as the growth implications of the GST rejig and tariffs,” Aditi Nayar, chief economist at Icra.

“We expect downward revisions in the expected growth trajectory to drive the rate cut decision, rather than the benign CPI inflation outlook, with the latter being driven by tax policy changes and not weaker demand,” Nayar added.

Rhik Kundu contributed to this story.