Banking Central| Inflation’s down but don’t pop the champagne yet

Food prices are highly vulnerable to seasonal shocks in India

India’s retail inflation dipping to a 75-month low of 2.82 percent in May comes as a relief for the Reserve Bank of India’s (RBI) monetary policy committee. For the fourth straight month, headline inflation has stayed below the central bank’s 4 percent target, with food inflation — one of the biggest drains on household budgets  — cooling to under 1 percent for the first time in almost four years.

This is no small feat in a country where food prices can make or break economic sentiment. But, having said that, the road ahead may not be easy. The implications are immediate and two-fold.

First, the RBI now has the breathing room to focus on growth, and rightly so, without the spectre of runaway prices.

With inflation well below the 4 percent midpoint, the pressure to keep interest rates high eases, potentially paving the way for further rate cuts. HSBC Global Research predicts a 25 basis points (bps) cut by December, bringing the repo rate to 5.25 percent.

The RBI’s aggressive growth focus could juice up an economy that, while robust, faces headwinds from global slowdowns and domestic consumption unevenness.

Second, for the average Indian, softer food prices, especially those of staples such as cereals and pulses, offer a much-needed reprieve after years of wallet-draining grocery bills.

Keep an eye on food prices

But the catch here is that the food prices can shoot up any time if a set of variables (monsoon distribution, supply shocks, global cues) that decide the price trends go wrong.

Yes, vegetable and pulse prices are down and a favourable monsoon, paired with subdued global commodity prices, could keep inflation at around 2.5 percent for the next six months, as economists from India Ratings and ICRA suggest.

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Yet, pockets of the food basket are still simmering. Edible oil inflation hit a 38-month high of 17.9 percent in May, despite the government’s move to halve customs duties on crude edible oil.

Fruits inflation, though slightly down, remained stubbornly in double digits for the fifth month running. Milk prices are creeping up too, with major producers hiking rates in May.

If one looks closely, these are not trivial. Edible oils and milk are kitchen staples, and their price surges hit harder than any headline number suggests.

More importantly, the core inflation, or inflation that excludes volatile gold prices, is at a comfortable 3.5 percent, but the metal’s above 30 percent year-on-year surge is keeping it elevated. If gold prices soften in the second half of 2025, as some forecasts predict, core inflation could drop further.

Too early to celebrate?

Going ahead, a stronger rupee and imported disinflation from China --and the RBI might find itself in a sweet spot. But the central bank isn’t popping the champagne either. After front-loading 100 bps rate cuts and slashing the cash reserve ratio, the RBI is signalling a pause until at least September. Why? Because inflation’s decline is partly a high-base effect, and growth, while strong, could cool if global conditions worsen or domestic demand falters.

The RBI’s cautious stance is a reminder that low inflation isn’t a victory lap — it’s a tightrope walk. Vegetable and fruit prices are already showing signs of rebounding, and any monsoon hiccup could derail the 2.5 percent projections. Plus, with elections behind us and fiscal pressures looming, the government’s ability to keep food prices in check through strategic stock releases or duty tweaks will be tested.

Economists like Sujan Hajra from Anand Rathi argue that this low-inflation, high-growth combo is a boon for equity markets but the hard reality is that stock markets don’t feed average Indian families. For the millions of Indians still reeling from years of high food costs, the real test is whether this dip translates into tangible relief at the grocery store.

So, yes, 2.82 percent inflation is a milestone worth noting. It gives the RBI wiggle room, boosts growth prospects, and eases the burden on consumers. But don’t get too comfy. The Indian economy is like a pressure cooker — turn the heat down too fast, and you risk undercooking growth; leave it on too long and prices could boil over. The MPC knows this, and so should we.

For now, it looks good but keep an eye on those vegetable stalls and oil cans. They’ll tell us more about the future than any headline number ever will.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)