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20 Dec 2025·Source: The Hindu
3 min
EconomyNEWS

RBI Grapples with Low Inflation: Is India's Economy Cooling Down?

India's inflation dips below RBI's target, sparking debate on economic growth and monetary policy.

RBI Grapples with Low Inflation: Is India's Economy Cooling Down?

Photo by Markus Winkler

India's Consumer Price Index (CPI) inflation has fallen to 4.87%, dipping below the Reserve Bank of India's (RBI) 4% target for the first time in 16 months. This unexpected drop, primarily driven by a sharp decline in food inflation, has sparked a debate within the Monetary Policy Committee (MPC) about whether the current monetary policy stance is too restrictive.

While some members, like Governor Shaktikanta Das, believe the current policy is appropriate to achieve the 4% target sustainably, others, like Jayanth Varma, argue that the real interest rate is too high, potentially stifling economic growth. This situation presents a dilemma for the RBI: maintain a tight stance to ensure inflation remains within target or ease policy to support growth, especially as core inflation remains sticky.

Key Facts

1.

CPI inflation fell to 4.87%

2.

First time below 4% target in 16 months

3.

Food inflation declined sharply

4.

Core inflation remains sticky at 5.6%

UPSC Exam Angles

1.

Monetary Policy Committee (MPC) - composition, functions, decision-making process.

2.

Inflation targeting framework - objectives, challenges, and effectiveness.

3.

Types of inflation - CPI, WPI, headline, core, food inflation, and their implications.

4.

Monetary policy tools and stance (repo rate, real interest rate, liquidity management).

5.

Trade-off between inflation control and economic growth.

6.

Role of the Reserve Bank of India in economic management.

Visual Insights

Key Economic Indicators: RBI's Dilemma (December 2025)

A snapshot of critical economic indicators as of December 2025, reflecting the current state of India's economy and the RBI's monetary policy challenges. It highlights the headline inflation dipping below target, the sticky core inflation, and the resulting real interest rate.

CPI (Headline) Inflation
4.87%-0.23% (from previous month est.)

Fell below RBI's 4% target for the first time in 16 months, signaling potential economic cooling. Primary measure for monetary policy.

RBI Inflation Target
4% (+/- 2%)

The medium-term target set by the Government for the RBI. The current CPI is within the tolerance band but below the central target.

Food Inflation
3.5% (est.)-1.0% (from previous month est.)

Sharp decline in food prices is the primary driver of the recent fall in headline CPI. Highly volatile component.

Core Inflation
5.5% (est.)Stable

Excluding volatile food and fuel, core inflation remains sticky, indicating underlying demand pressures or structural issues. This complicates RBI's policy decisions.

Repo Rate (Policy Rate)
6.5% (est.)Stable (last few months)

The rate at which RBI lends to banks. Maintained at a relatively high level to combat previous inflation, now debated as 'too restrictive'.

Real Interest Rate
1.63% (est.)

Calculated as Nominal Repo Rate (6.5%) - CPI Inflation (4.87%). Some MPC members argue this is 'too high', potentially stifling economic growth.

More Information

Background

India adopted a flexible inflation targeting (FIT) framework in 2016, with the Reserve Bank of India (RBI) mandated to maintain Consumer Price Index (CPI) inflation at 4% with a +/- 2% tolerance band. This framework was based on the recommendations of the Urjit Patel Committee. Prior to this, the RBI operated under a multiple indicator approach, often leading to ambiguity in its primary objective.

Latest Developments

The recent dip in CPI inflation to 4.87%, falling below the 4% target for the first time in 16 months, primarily due to a sharp decline in food inflation, has triggered a debate within the Monetary Policy Committee (MPC). Some members argue that the current restrictive monetary policy stance, characterized by high real interest rates, might be stifling economic growth. Others maintain that the stance is appropriate to ensure inflation sustainably reaches the 4% target, especially given the stickiness of core inflation.

Practice Questions (MCQs)

1. Consider the following statements regarding India's Monetary Policy Committee (MPC): 1. The MPC consists of six members, with three nominated by the Government of India and three by the Reserve Bank of India. 2. The Governor of the Reserve Bank of India chairs the MPC and has a casting vote in case of a tie. 3. The primary objective of the MPC is to maintain price stability while keeping in mind the objective of growth. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: D

Statement 1 is correct: The MPC has six members – three officials of the RBI (Governor, Deputy Governor in charge of monetary policy, and one officer nominated by the Central Board) and three external members nominated by the Government of India. Statement 2 is correct: The RBI Governor is the ex-officio Chairperson of the MPC and has a second or casting vote in case of a tie. Statement 3 is correct: As per the RBI Act, 1934, the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. This is the mandate of the MPC. Therefore, all three statements are correct.

2. In the context of monetary policy and inflation management in India, which of the following statements is/are correct regarding 'real interest rate' and 'core inflation'? 1. Real interest rate is the nominal interest rate adjusted for expected inflation, reflecting the true cost of borrowing or return on saving. 2. A high real interest rate typically encourages investment and consumption, thereby boosting economic growth. 3. Core inflation excludes volatile components like food and fuel prices, providing a clearer picture of underlying demand-side inflationary pressures. Select the correct answer using the code given below:

  • A.1 and 2 only
  • B.1 and 3 only
  • C.2 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: B

Statement 1 is correct: Real interest rate = Nominal interest rate - Inflation rate (or expected inflation rate). It represents the purchasing power of interest earned or paid. Statement 2 is incorrect: A high real interest rate makes borrowing more expensive and saving more attractive. This typically discourages investment and consumption, potentially slowing down economic growth, which is the concern raised by MPC member Jayanth Varma. Statement 3 is correct: Core inflation is a measure of inflation that excludes volatile components such as food and energy prices. This is done to better understand the underlying and persistent trends in inflation, often driven by demand-side factors, without the distortions caused by temporary supply shocks. Therefore, statements 1 and 3 are correct.

3. Which of the following statements correctly differentiates between Consumer Price Index (CPI) and Wholesale Price Index (WPI) in India? 1. CPI measures changes in the average price level of goods and services purchased by households, while WPI tracks price changes at the wholesale level. 2. Services are included in the calculation of CPI but are generally excluded from WPI. 3. The Reserve Bank of India primarily uses WPI for its inflation targeting framework, while the government uses CPI for policy decisions. Select the correct answer using the code given below:

  • A.1 only
  • B.2 and 3 only
  • C.1 and 2 only
  • D.1, 2 and 3
Show Answer

Answer: C

Statement 1 is correct: CPI reflects the cost of living for consumers, covering retail prices, whereas WPI measures price changes before goods reach retailers, at the wholesale level. Statement 2 is correct: CPI includes both goods and services (e.g., healthcare, education, transport), making it a comprehensive measure of consumer inflation. WPI, by its nature, primarily focuses on goods traded in bulk and generally excludes services. Statement 3 is incorrect: The Reserve Bank of India (RBI) primarily uses the Consumer Price Index (CPI) for its inflation targeting framework, as recommended by the Urjit Patel Committee. While WPI is also published and used for analysis, CPI is the key metric for monetary policy decisions. The government also uses CPI for various policy decisions, including dearness allowance calculations. Therefore, statements 1 and 2 are correct.

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