Relevance (UPSC): GS-III – Indian Economy (Growth, Inflation, Monetary Policy)

Retail inflation, measured by the consumer price index, has eased to 1.54% year-on-year. This is well below the lower tolerance band of 2% around India’s medium-term inflation target of 4%. In simple words, the average price rise faced by households slowed sharply.

What likely drove the fall

• Base effect: last year’s high prices make this year’s rise look smaller.
  
• Softer food prices in vegetables and edible oils; some easing in cereals due to better arrivals.
  
• Continued weakness in fuel and transport items; modest increases in housing and health.
  
• Low core inflation (non-food, non-fuel) pointing to mild demand-side pressures.
  

Why this matters

• If such low inflation persists, real interest rates rise, tightening financial conditions even without a policy rate move.
  
• It may create limited space for the Monetary Policy Committee to consider a gentler stance, provided food and fuel risks stay calm and growth remains steady.
  
• For households, lower inflation protects purchasing power; for the government, it helps bond yields and subsidy arithmetic.
  

Risks to watch

• Weather shocks to crops, global crude oil swings, shipping disruptions, and large administered price changes (for example, minimum support prices, electricity tariffs).
  

Key terms 

• Headline inflation: overall consumer price index.
  
• Core inflation: consumer price index excluding food and fuel.
  
• Base effect: current growth looks low or high because last year’s base was high or low.
  
• Real interest rate: policy rate minus inflation.
  

Exam hook

UPSC Prelims question
Q. Consider the following statements:

1. India’s inflation target is 4 percent with a tolerance band of 2 to 6 percent set by the Union Government in consultation with the Reserve Bank of India.
   
2. If inflation remains outside the 2 to 6 percent band for three consecutive quarters, the Reserve Bank of India must report reasons and remedial steps.
   
3. The Monetary Policy Committee has six members.
   Which of the statements given above are correct?
   Answer: 1, 2 and 3.
   

One-line wrap: A rare cool print at 1.54% is welcome, but policy must guard against food and fuel shocks while keeping growth on track.