Significant Deceleration in India’s Inflation: Drop to 2.82% in May Encourages Monetary Expansion

Central Bank Accelerates Pace with 50 Basis Points Rate Cut

India’s inflation continued to decelerate significantly in May 2025, dropping to 2.82% year-on-year, a figure that pleasantly surprised markets and analysts who had expected a 3% increase. The data, released by India’s Ministry of Statistics and Programme Implementation, shows a continued downward trend from the 3.16% recorded in April, indicating meaningful relief from inflationary pressures that had plagued the Indian economy in recent years.

Sharp Decline in Food Prices Drives the Trend

The primary driver behind the inflation deceleration lies in the dramatic drop in food prices, which constitute a central component of the Indian consumer basket. Food inflation plummeted to 0.99% in May, a significant decline from the 1.78% recorded in the previous month. This drop reflects the impact of early monsoon season, improved crop yields, and effects of government policies aimed at stabilizing basic food prices.

Prices of vegetables, pulses, eggs, and spices fell notably, directly impacting the standard of living for hundreds of millions of Indian consumers. Since food prices constitute approximately half of the Indian price index basket, their impact on overall inflation is particularly significant.

Reserve Bank of India Accelerates Monetary Expansion

In response to slowing inflation, the Reserve Bank of India (RBI) surprised markets this week with a substantial 50 basis points rate cut, bringing the benchmark repo rate down to 5.50% – a level not seen since August 2022. This marks the third consecutive cut since February, reflecting a shift in monetary policy direction toward more aggressive economic stimulus.

RBI Governor Sanjay Malhotra explained that the decision stems from sustained inflation deceleration, alongside economic growth that has been “lower than our aspirations amidst a challenging global environment and heightened uncertainty.” This decision demonstrates efforts to accelerate economic activity heading into the second half of the year.

Optimistic Forecasts and Comparison to Official Targets

Nomura economists predict inflation will remain at a subdued 3.3% on average for fiscal year 2026, a figure below the central bank’s 3.7% target. The forecast is based on continued decline in commodity prices, weakened economic activity, and an influx of cheap Chinese goods into the Indian market.

In line with this forecast, the investment bank expects two additional 25 basis points cuts each in October and December, bringing the terminal rate to 5%. This move is designed to support economic growth and ensure continued macroeconomic stability.

Strong Economic Performance Against Global Challenges

Despite challenges, the Indian economy continued to display exceptional performance. In the fourth quarter of fiscal year 2025, the economy grew at a 7.4% annual rate, exceeding expectations of 6.7%. For the entire fiscal year 2025, growth reached 6.5%, in line with government estimates.

The central bank maintained its growth forecast for the current fiscal year, ending in March 2026, at 6.5%. This forecast reflects confidence in the Indian economy’s resilience and its ability to adapt to changing conditions.

Efforts to Address Global Trade Tensions

Against the backdrop of American tariff threats that could reach 26% on Indian goods, the Indian government is engaged in intensive negotiations with the United States to formulate an interim trade agreement. According to Reuters reports, negotiations between the countries are close to an initial agreement that would focus on market access for selected industrial and agricultural products, and reduction of tariffs and non-tariff barriers.

The interim agreement is considered an important step in maintaining Indian export growth, particularly in technology, textile, and pharmaceutical sectors, which constitute pillars of the Indian economy.

Looking Forward: Challenges and Opportunities

The inflation deceleration provides Indian policymakers with increased maneuvering room to support economic growth. However, significant challenges remain, such as global risks, energy price volatility, and the need to maintain long-term financial stability.

Economists emphasize that continued downward inflation trends will be subject to global developments, weather conditions, and the effectiveness of fiscal and monetary policies. On the positive side, the current inflation decline strengthens India’s position as one of the world’s leading growing economies and contributes to regional stability in East Asia.

With encouraging inflation data and supportive monetary policy, India is well-positioned for continued strong economic growth while maintaining price stability and improving the standard of living for its citizens.