Although low inflation rate and high growth led the Monetary Policy Committee (MPC) to reduce repo rate by 25 basis points (bps) earlier this month to support growth, the drastic fall in inflation numbers remained a cause for concern, the minutes of the MPC released by the Reserve Bank of India (RBI) on Friday indicate.
“The current inflation rate is actually too low, breaching the lower bound in the flexible inflation targeting regime, especially if precious metals like gold are excluded. Besides, too low an inflation rate is not healthy for a developing country like India, suggesting a demand deficit,” external MPC member Nagesh Kumar wrote.
He said inflation not only continued to remain benign, the headline CPI too declined further to 0.3% in October 2025, largely driven by decreasing food prices. “It is in contrast to FY25: Q2, when the growth was slowing, but inflation was at relatively high levels,” he pointed out.
Stating that inflation had continued to undershoot forecasts, external MPC member Saugata Bhattacharya said while the low prints had largely emanated from a small set of components, the broader basket of “underlying” inflation too was likely to undershoot the inflation target for many months.
“In addition, there is little to signal a risk of potential overheating of capacity even if growth momentum were to sustain. Household inflation expectations remain well anchored and have responded to the recent sharp drop in inflation,” he stated.
External member Prof. Ram Singh said in his statement that the prevailing low inflation would squeeze profit margins and increase the real value of debt and interest rates for the private sector.
“Disinflationary expectations running across several quarters can dampen and defer private-sector investment even in the short run. As MSMEs’ businesses operate in highly competitive markets and have limited ability to raise prices through the market power channel but the wages tend to be downward sticky, low inflation is detrimental to their interests as well,” he emphasised.
Deputy Governor Poonam Gupta stated that inflation had been below the 4% target for the last nine months averaging 2.3% and was likely to remain well contained for at least nine more months. “The average inflation for 2025-26 is projected to be 2.0%, down by 60 bps from the October policy.
The most crucial recent development from the perspective of monetary policy has been the faster than anticipated moderation in CPI headline inflation,” she wrote. “Going ahead, good agricultural production, low food prices and exceptionally benign international commodity price outlook suggest that headline inflation for the full year (2025-26) is likely to be around 2%, half of what was projected at the beginning of the year, RBI Governor Sanjay Malhotra wrote in his statement.
“Headline inflation is projected to be close to the 4% target in H1:2026-27. Excluding precious metals, inflation is likely to be much lower, as has been the trend since the beginning of 2024,” he stated.
Thus, demand pressures, as evident from low core inflation (excluding precious metals), were minimal and projected to remain low in the next three quarters, he pointed out.
“Considering the benign inflation outlook – headline as well as core – real interest rates need to be lower. Therefore, I vote for a 25-bps rate cut. This will also stimulate demand and be growth supportive,” he stated.
Emphasising that a rate cut could add to the pressure on the INR, Prof Singh said the Real Effective Exchange Rate (REER) for INR had fallen substantially due to FPI outflows triggered by global financial market uncertainty and less appealing price-earnings ratios for India.
“However, the economy’s fundamentals – BOP, Forex, fiscal deficit, debt-to-GDP ratio, corporate and bank balance sheets, inflation, and growth dynamics – are all robust. Therefore, I expect exchange pressures and FPI flows to be self-limiting,” he wrote.
“As such, the depreciation is unlikely to cause imported inflation due to low oil and commodity prices – international pricing benchmark Brent crude (BZ=F) has fallen to a lowest level in recent times and World Bank’s CPF has projected most prices to moderate in 2026,” he mentioned.
Published – December 19, 2025 10:25 pm IST
