Understanding India's CPI Inflation: Trends, Impacts, and Outlook for FY26

India's 2025 economic landscape has been characterized by dramatic changes in inflation patterns, specifically with respect to the Consumer Price Index (CPI). CPI is an essential measure of retail inflation that captures the average long-term change in the price paid by urban consumers for a standardized basket of goods and services. This blog explores India's recent CPI inflation trends, drivers behind it, and implications for consumers and policymakers.


A Historic Low: CPI Inflation at 1.54% in September 2025

In September 2025, India's retail inflation, as measured by the CPI, plummeted to 1.54%, the lowest level in over eight years. This sharp decline from the previous month's 2.07% was primarily driven by a significant drop in food prices, which had been in deflation for the fourth consecutive month. The Consumer Food Price Index (CFPI) also dipped into deflation at 2.28%, with significant falls in the price of vegetables (down 21.38%), onions (down 49.85%), and pulses (down 15.32%) compared to last year


The reasons behind the Fall

There were some reasons why this was the first time ever that inflation was falling:


Heavy Monsoon and Crop Harvest: Well-distributed monsoon rains resulted in a bumper harvest of food products, creating an abundance of supplies and lowering their prices.


GST Rationalization: The recent reduction in Goods and Services Tax (GST) rates, especially on inputs, has further eased the price burden on consumers


Stable Global Commodity Prices: A stable global commodity market, with no sharp accelerations in oil or metal prices, supported domestic price stability


Core Inflation: An Ongoing Concern

Whereas headline inflation declined considerably, core inflation, excluding food and energy, was still high at 4.5%. This constant pressure was due to increases in the cost of housing, healthcare, and education. Housing inflation, for example, rose to 3.98% from 3.09%, while education and health services recorded 3.44% and 4.34% inflation rates, respectively


RBI's Monetary Policy Response

The Reserve Bank of India (RBI) has been observing these inflation trends closely. Given the modest CPI numbers, the RBI trimmed its inflation estimate for the 2025–26 fiscal year to 2.6%, down from a previous forecast of 3.1%. This revision demonstrates the central bank's faith in prolonged price stability, supported by encouraging crop yields and successful policy interventions


Moreover, the RBI has kept the policy repo rate at 5.5% for the second review in a row, marking a cautious stance towards monetary policy in the face of the changing economic environment.


Regional Disparities in Inflation

Inflation rates showed regional differences:


Rural Areas: Inflation was at 1.07%, from 1.69% in August, reflecting that rural consumers garnered more advantage from the fall in food prices.


Urban Regions: Inflation was marginally higher at 2.04%, against 2.47% in August, due to a more nuanced structure of prices based on non-food items


FY26 Outlook: Balanced View

In the future, estimates for FY26 indicate that the trend will continue:


Crisil is predicting average CPI inflation of 4% in FY26 based on good food inflation and contained non-food inflation owing to softer commodity prices.


Morgan Stanley projects RBI rate easing cycle of 75 basis points, attributing lower than expected inflation prints as well as softening food prices as the most important factors.


Challenges, however, persist. Core pressures of inflation in housing and services would threaten price stability on a sustained basis. Moreover, uncertainty in the global economy and policy shift in the advanced economies could impact domestic inflation trends.


Implications for Consumers and Policymakers

For consumers, the prevailing low inflationary environment amounts to higher purchasing power, particularly in rural India where the impact is more significant. But the fact that core inflation continues in areas such as housing and education calls for ongoing alertness.


Policymakers are confronted with the twin task of promoting economic growth and containing inflationary pressures. The RBI's conservative monetary policy stance along with accommodative fiscal support will be vital to steer through these challenges.


Conclusion

India's CPI inflation in 2025 has presented an impressive drop, a result of an alignment of favorable conditions in the agricultural sector, successful policy action, and stable global economic conditions. Though the near-term scenario looks promising, continued focus on the core inflation drivers and developments in the global economy will be crucial in the case of maintaining long-term price stability and economic expansion.