India recorded one of the sharpest declines in headline inflation (~1.8 pp) among major EMDEs in 2025, while simultaneously posting GDP growth of 8% in H1 FY26 — achieving disinflation without overheating. Global rating agency S&P acknowledged this, noting inflation targeting has "reaped dividends" with expectations better anchored than a decade ago.
The world saw broad-based and sustained moderation in inflation across advanced economies (AEs), emerging market and developing economies (EMDEs), and developing nations — driven by easing commodity prices (food & energy) and responsive monetary policies.
| Country | Inflation Trend (2025) | Growth | Key Driver |
|---|---|---|---|
| India | Sharpest decline (~−1.8 pp) | 8% (H1 FY26) | Food supply + monetary policy |
| China | Significant deflation | Below EMDE avg 4.2% | Weak demand, excess capacity, tariff pressures |
| Brazil | Rose 4.4% → 5.2%, then eased | Below avg | Service inflation persistence |
| Russia | Persistently high inflation | Subdued | Ukraine conflict + trade sanctions |
| Malaysia/Indonesia/Philippines | Moderated | Varied | Lower imported commodity costs |
EMDE average inflation: 5.3% | EMDE average GDP growth: 4.2%. India stood out — both lower inflation AND higher growth than the EMDE average, placing it in the "ideal" quadrant of the inflation-growth trade-off chart.
| Year | CPI Headline | WPI Headline | Key Feature |
|---|---|---|---|
| 2022–23 | 6.7% | 9.41% | Post-pandemic surge |
| 2023–24 | 5.36% | −0.73% | WPI in deflation |
| 2024–25 | 4.63% | 2.27% | Gradual disinflation |
| 2025–26 (Apr–Dec) | 1.72% | 0.04% | Lowest in current CPI series |
Disinflationary phase began with CPI at 6.2%
CPI fell from 3.2% → 1.4%, averaging 2.2%
CPI at 0.3% — lowest ever in CPI 2012=100 series
WPI (factory-gate price) has consistently been lower than CPI and has mirrored the broad disinflationary trend, exerting a moderating effect on CPI. This means upstream input cost pressures are not translating into consumer price pressures.
Core inflation (excl. food & fuel) appeared sticky, rising from 3.5% (FY25) to ~4.3% (FY26), with December 2025 at 4.62%. This created a puzzling divergence with falling headline inflation.
Granular analysis reveals that the apparent stickiness is largely driven by sharp increases in precious metals (gold & silver), which touched lifetime highs amid global uncertainty and safe-haven demand. When excluded, core inflation shows a declining trajectory mirroring headline.
| Measure | Dec 2025 | Note |
|---|---|---|
| Standard Core (excl. food & fuel) | 4.62% | Appears sticky |
| Core excl. Petrol & Diesel (P&D) | 4.81% | Administered prices removed |
| Core excl. Gold & Silver (G&S) | 2.27% | Wedge = ~235 bps! |
| Core excl. both P&D and G&S | 2.36% | Wedge = ~226 bps |
The wedge between standard core (4.62%) and core excluding precious metals (2.27%) is ~235 basis points. Between June and December 2025, core excl. precious metals decelerated from 3.4% to 2.3%, even as standard core remained elevated at ~4.6%. Conclusion: No broad-based inflationary momentum — it's purely a precious metals phenomenon.
These four components account for ~1/3 of CPI basket and >60% of core measure:
Inflation can be decomposed into: (1) Momentum effect (month-on-month current year price changes) and (2) Base effect (influence of prior year price levels). In FY26, the base effect played a dominant role — its downward influence outweighed the momentum effect in 7 out of 9 months, driving significant disinflation.
Food inflation entered deflationary territory since June 2025. October 2025 saw the biggest monthly decline of −5.02% in the present CPI series — a historic first. This was driven by vegetables (deeply negative), pulses (declining for ~9 months), spices (deflation for 18 months), and cereals (6.2% Jan 2025 → −0.4% Dec 2025).
| Food Component | Inflation (Dec 2025) | Key Note |
|---|---|---|
| Vegetables (overall) | Deeply negative | Led entire food disinflation |
| Pulses | −15.1% | 9 months continuous decline |
| Spices | −2.15% | 18 months in deflation |
| Cereals | −0.4% | From 6.2% in Jan 2025 |
| Eggs | 5.12% | Recovered after temporary dip |
| Meat & Fish | 4.76% | Recovered after temporary dip |
| Milk & Products | 2.56% | Stable throughout |
In 2025-26, onion buffer stocks were released from September 2025 through direct retail sales at discounted prices + supplies to mandis in major consumption centres. The use of rail transport for onion movement (initiated in 2024-25) was further scaled up to ensure cost-effective market intervention.
India's pulses market has structural excess demand. 2023-24 saw elevated prices due to production shortfalls and low carry-forward stocks. Domestic production recovering in FY26 supported by stable imports.
Mandi price monitoring with analytical tools for early signals. Procurement of 6.5 lakh MT in previous season. Government monitors tur acreage expansion.
| Commodity | Duty | When | Rationale |
|---|---|---|---|
| Yellow Peas (close substitute for chana) | 30% | October 2025 | Ahead of chana sowing season — protect farmer interests, support domestic prices |
| Masoor (red lentils) | 10% | Current | Protect domestic market |
| Chana (Bengal gram) | 10% | Current | Protect domestic market |
India imports over 50% of domestic edible oil consumption — structural excess demand. Domestic prices are highly sensitive to global prices, exchange rate, and trade policy.
| Action | Date | Basic Customs Duty | Purpose |
|---|---|---|---|
| BCD on crude edible oils raised | September 2024 | 0% → 20% | Support domestic prices as global prices fell sharply |
| BCD on crude edible oils reduced | June 2025 | 20% → 10% | Alleviate rising consumer prices as FY26 prices rose again |
The duty reduction's impact is evident — edible oil inflation moderated since August 2025.
Timely trade policy decisions, strategic buffer stock management, and targeted market interventions have enabled effective management of price cycles. Retail price volatility in pulses has been much lower in 2022-24 vs 2015-17 despite similar production challenges — demonstrating improved policy effectiveness over the decade.
Below-normal temperature through most of 2025 + above-normal monsoon + augmented reservoir levels = ideal conditions for Kharif harvest and Rabi sowing momentum. This has kept food inflation at bay and will continue to do so in upcoming months.
GDP deflator = Nominal GDP / Real GDP. Unlike CPI/WPI, it reflects economy-wide price movements including services and compositional changes. For a sector: Implicit Price Deflator = Nominal GVA / Real GVA (ratio around base year = 1.0).
| Sector | FY05 Deflator | FY25 Deflator | Growth |
|---|---|---|---|
| Agriculture | ~1.0 | 2.17 | Fastest growing |
| Services | ~1.0 | 1.75 | 2nd fastest |
| Industry | ~1.0 | 1.55 | Moderate |
| Manufacturing | ~1.0 | 1.41 | Slowest — global competition |
Manufacturing ToT with agriculture: ~1.29 (FY05) → 0.65 (FY25) — a decline of 50% over 20 years. Agriculture has enjoyed government support (MSP-linked annual price increases).
Manufacturing ToT with services: declined 25% to 0.81 by FY25. Services enjoy greater pricing power through brand differentiation and less global competition.
| Metric | Two Decades Ago | FY25 | Implication |
|---|---|---|---|
| Share in GVA (current prices) | 17–18% | ~14% | Declining ToT → lower nominal share |
| Share in GVA (constant prices) | ~18% | ~18% | Real output stable |
| Share in Gross Value of Output (GVO) | ~38% | ~38% | Actual production share stable |
Better terms of trade for agriculture may encourage resource shift towards farming (more land, labour returning to agriculture — both visible in India). The declining manufacturing ToT calls for "Farm-to-Fork" policies — streamlining supply chains from producers to consumers, reducing intermediaries, emphasising freshness and local sourcing. India Inc.'s profit margins have not shown stress, suggesting cost-cutting innovations are preserving competitiveness.
Rural consumption basket assigns a higher weight to food items compared to urban baskets. Since food prices are inherently more volatile (weather-sensitive, seasonal), rural inflation exhibits greater volatility. When food prices surge, rural inflation spikes more; when food deflates, rural inflation falls more sharply.
In FY26 (Apr–Dec), Kerala (8.05%) and Lakshadweep (6.69%) exceeded the RBI's upper tolerance band of 6%. All other states remained within the 2-6% band or below. This is an important factual data point for UPSC.
| State/UT | 2022-23 | 2023-24 | 2024-25 | 2025-26 (Apr-Dec) |
|---|---|---|---|---|
| Kerala | 5.79 | 4.97 | 5.89 | 8.05 ⚠️ |
| Lakshadweep | 7.28 | 3.57 | 3.05 | 6.69 ⚠️ |
| Jammu & Kashmir | 6.34 | 4.15 | 4.48 | 3.60 |
| Karnataka | 5.49 | 5.79 | 4.93 | 3.14 |
| Punjab | 6.08 | 5.53 | 4.16 | 3.27 |
| Delhi | 4.00 | 2.55 | 2.40 | 0.96 |
| Uttar Pradesh | 7.07 | 5.76 | 5.30 | 0.30 |
| Assam | 6.54 | 4.59 | 5.06 | 0.16 |
| Telangana | 8.61 | 6.36 | 3.67 | 0.20 |
| Bihar | 5.74 | 5.84 | 6.04 | 0.01 |
| All India | 6.66 | 5.36 | 4.63 | 1.72 |
AR(1) coefficient for all states > 0.7 → inflation differentials are positively persistent (not purely transitory). South & Northeast states tend to have above-average inflation with higher persistence. Delhi, HP tend to be below-average.
States with above-national-average wage rates → higher inflation (positive association). Higher GSDP growth also associated with higher state inflation. COVID had a structural step-up influence on prices.
Higher share of industrial output in state GVA shows negative association with state inflation — confirming supply-side efficiencies in manufacturing dampen price pressures. GST imposition was found to be price neutral for state-level inflation differentials.
| Agency | FY26 Projection | FY27 Projection | Q1 FY27 | Q2 FY27 |
|---|---|---|---|---|
| RBI | 2.0% (revised down from 2.6%) | — | 3.9% | 4.0% |
| IMF | 2.8% | 4.0% | — | — |
Note: RBI revised FY26 downward from 2.6% to 2.0% due to good kharif harvest and healthy rabi sowing.
INR depreciation could pave way for imported inflation. Edible oils particularly vulnerable (50%+ imported).
Gold & silver safe-haven demand may continue. If pace of 2025 is not sustained, core excl. precious metals may be higher, not lower.
Geopolitics may disrupt expected commodity price declines. Copper demand from AI data centres & green tech keeps its price elevated.
Strong Rabi sowing (+3.3%) Record kharif harvest Adequate reservoir storage Global commodities declining ~7% FY27 (World Bank) Crude oil subdued — oversupply GST rate rationalisation pass-through Increased fertiliser supply keeping input prices in check
India's inflation rate — both headline and core excluding precious metals — will likely be higher in FY27 than FY26. However, this is unlikely to be a concern as it would still be within the RBI's target range of 4% (±2%), aligned with the convergence that monetary policy aimed for. The disinflation of FY26 was exceptional and not expected to sustain indefinitely.
CPI (Consumer Price Index): Measures retail price of a basket of goods/services consumed by households. Base year 2012=100. Reflects demand-side inflation. Used by RBI for inflation targeting.
WPI (Wholesale Price Index): Measures price at factory gate/wholesale level. Base year 2011-12. Reflects supply/production-side prices. Lower than CPI typically indicates no cost-push transmission.
GDP Deflator: Economy-wide price index. Nominal GDP / Real GDP. Covers all goods & services in economy. Not a fixed basket — adjusts with output composition. Best for understanding sectoral terms of trade.
Headline Inflation: Total CPI — includes all components including food and fuel. Most volatile because food and energy prices fluctuate with weather, geopolitics.
Core Inflation: CPI excluding food & beverages and fuel & light. Measures underlying or structural inflation. More stable indicator for monetary policy. Currently being distorted by gold/silver surge.
Food Inflation: CPI component for food & beverages only. Given food's high weight in Indian CPI basket (especially rural), this largely drives headline inflation movements.
India adopted Flexible Inflation Targeting in 2016. RBI is mandated to maintain CPI inflation at 4% with ±2% tolerance band (2–6%). The target is reviewed every 5 years. The Monetary Policy Committee (MPC) — 6 members (3 RBI + 3 external) — decides on repo rate.
Success: S&P noted that inflation targeting has "reaped dividends" — inflation expectations better anchored, moving from double-digit (2008-14) to 5.5% average (last 3 years) and recently at lower bound of target.
Year-on-year inflation = Momentum Effect + Base Effect
Key FY26 finding: Base effect dominated in 7 out of 9 months — its downward influence outweighed momentum effect, driving much of the observed disinflation. This is partly why disinflation cannot be taken entirely at face value.
Terms of Trade measures the relative price of a sector's output vis-à-vis another sector. For manufacturing vs agriculture:
Implications: Agriculture getting more expensive = better incomes for farmers + resource reallocation toward farming. Manufacturing facing cost pressures from agricultural inputs while global competition prevents price increases. India Inc. responding with cost-cutting and labor-saving innovations rather than passing costs to consumers.
When a country's currency depreciates, imports become more expensive in local currency terms, leading to imported inflation. India is vulnerable in:
• Edible oils (50%+ imported) • Crude oil (net importer) • Precious metals (large importer) • Electronics & industrial inputs
The trade-off: INR depreciation helps exports (as shown in Chapter 4 ARDL analysis) but creates imported inflation risks. In FY25, INR depreciated ~5.4% — contained impact due to global commodity price softness.
Government maintains buffer stocks of essential commodities (onions, pulses, edible oils) to release into the market when prices spike, preventing excessive inflation. Key mechanisms:
• Price Stabilisation Fund (PSF): Used to procure and hold buffer stocks of pulses and edible oils
• NAFED/NCCF: Government agencies that procure at MSP and release buffers
• Rail transport for onions: New 2024-25 initiative — using railways to quickly move onions from surplus (Maharashtra, Rajasthan) to deficit regions, reducing transport costs
• Import duty calibration: Raising duties when domestic prices fall too low (protects farmers), cutting duties when prices rise too high (protects consumers)
Disinflation: Inflation is still positive but falling. Prices are still rising, just at a slower rate. India's headline CPI went from 6.7% → 1.7% — this is disinflation (prices rising at lower rate).
Deflation: Prices are actually falling — negative inflation rate. India's food inflation entered deflation (below 0%) since June 2025. October 2025 food inflation was −5.02%. Some individual items like onion (−48.1%), garlic (−64.8%) experienced severe deflation.
⚠️ Deflation can be harmful too: If consumers expect prices to fall further, they delay purchases (like China in 2025 — weak domestic demand). Sustained deflation can reduce producer incomes and trigger a deflationary spiral.