Banking Central| Although inflation is declining, don't celebrate just yet.

In May, the Reserve Bank of India's (RBI) monetary policy council was relieved to see retail inflation in India drop to a 75-month low of 2.82 percent. One of the largest burdens on household budgets, food inflation, has cooled to less than 1 percent for the first time in nearly four years, while headline inflation has remained below the central bank's 4 percent target for the fourth consecutive month. In a nation where food costs have the power to make or break economic sentiment, this is no little accomplishment. Nevertheless, the path ahead might not be simple. There are two immediate ramifications. First, without the threat of uncontrollable pricing, the RBI can now, and correctly, concentrate on growth. The need to maintain high interest rates lessens now that inflation is much below the 4 percent threshold, which could lead to additional rate reductions. By December, the repo rate is expected to drop by 25 basis points (bps), to 5.25 percent, according to HSBC Global Research. Although the economy is strong, it faces challenges from global slowdowns and unequal domestic consumption. The RBI's aggressive growth strategy could boost this economy. In May 2025, India’s retail inflation saw a significant drop, falling to 2.82%, the lowest level in 75 months. This decline was largely driven by a sharp decrease in food inflation, which for the first time in nearly four years, dropped below 1%. With this drop in inflation, the Reserve Bank of India (RBI) has successfully kept inflation below its 4% target for four consecutive months. This positive shift in inflation provides the RBI with the opportunity to refocus its efforts from controlling inflation to fostering economic growth. The easing inflationary pressure allows the RBI to consider further rate cuts to stimulate the economy. HSBC Global Research predicts that the RBI may reduce the repo rate by 25 basis points to 5.25% by December 2025. The reduction in interest rates could be beneficial in providing financial relief to borrowers and stimulating investment, especially in sectors that have been lagging behind due to high borrowing costs. The shift in policy is expected to encourage more lending and spending, which would help boost economic activity. However, the economic outlook remains challenging despite the favorable inflation data. Global economic slowdowns, especially in major trading partners, and the uneven pace of domestic consumption continue to pose risks. While large companies remain cautious, there is potential for small- and medium-sized businesses to benefit from the lower rates and increased liquidity. The RBI’s growth strategy may support economic activity in these sectors, but its success will depend on how effectively banks and borrowers respond to the changes. Despite these challenges, the decline in inflation presents a cautiously optimistic outlook for India’s economy. With inflation under control and the RBI focused on supporting growth, there is potential for a more balanced economic recovery. However, the path to stability may be complex, and it remains to be seen how the global and domestic economic conditions evolve in the coming months.