India’s recent macroeconomic picture presents an apparent paradox. Even as strong growth and subdued prices prompted the Monetary Policy Committee (MPC) to cut the repo rate by 25 basis points, the sharp and persistent fall in inflation itself has emerged as a concern. The minutes of the MPC meeting released by the Reserve Bank of India reveal a growing unease that inflation may now be too low for a developing economy.
What prompted the repo rate cut?
The MPC’s decision to lower the policy rate was guided by two broad trends: resilient growth momentum and a prolonged phase of low inflation. Headline consumer price inflation fell to just 0.3% in October 2025, significantly below the medium-term target of 4% under India’s flexible inflation targeting framework. Such benign inflation created space for monetary easing to support growth without immediate price stability risks.
Why low inflation is now seen as a problem
Several MPC members flagged that inflation has breached the lower tolerance band, raising red flags. External member Nagesh Kumar noted that when volatile components such as precious metals are excluded, inflation appears even weaker, pointing to a possible demand deficit in the economy. For a developing country, persistently low inflation may signal inadequate consumption and investment rather than macroeconomic comfort.
Undershooting the target, not just headline numbers
Another concern highlighted in the minutes is that low inflation is not confined to a few items. External member Saugata Bhattacharya observed that even “underlying” inflation—reflecting the broader consumption basket—is likely to remain below target for several months. Importantly, household inflation expectations remain well anchored, suggesting limited risk of demand overheating even if growth sustains.
Impact on investment and private sector balance sheets
External MPC member Prof. Ram Singh cautioned that prolonged disinflation can have adverse real-economy effects. Low inflation raises the real burden of debt and interest rates, squeezing corporate margins. This is particularly damaging for MSMEs, which operate in highly competitive markets with limited pricing power, while wages tend to be downward sticky. Such conditions can dampen private investment and delay recovery impulses.
RBI’s assessment of the inflation trajectory
Deputy Governor Poonam Gupta noted that inflation has averaged just 2.3% over the past nine months, well below the 4% target, and is expected to remain contained for at least three more quarters. The projected average inflation for 2025–26 has been revised down to around 2%, reflecting faster-than-anticipated moderation in prices.
In his statement, RBI Governor Sanjay Malhotra attributed the sharp decline largely to good agricultural output, low food prices and a benign global commodity environment. These factors, while positive in isolation, collectively reinforce the disinflationary trend.
What this means for monetary policy
The current situation complicates policy choices. While low inflation allows room for rate cuts, excessively weak price pressures risk entrenching disinflationary expectations. For the MPC, the challenge lies in balancing growth support with the need to prevent a slide toward demand stagnation.
What to note for Prelims?
- Repo rate cut by MPC and its rationale.
- Flexible inflation targeting: 4% target with tolerance band.
- Headline CPI inflation at 0.3% in October 2025.
- Projected inflation of around 2% for 2025–26.
What to note for Mains?
- Why very low inflation can be harmful for a developing economy.
- Link between disinflation, demand deficit and investment slowdown.
- Impact of low inflation on MSMEs and private sector balance sheets.
- Monetary policy trade-offs in a low-inflation, high-growth scenario.
The MPC minutes underline that price stability is not merely about preventing high inflation. For India, sustaining moderate inflation is equally crucial to ensure healthy demand, investment confidence and long-term growth.
