India’s CPI inflation decelerated to a 75-month low of 2.82% YoY in May-25 from 3.16% in Apr-25. Notably:

• The headline inflation print posted its seventh consecutive downward surprise – the market consensus expectation for May-25 was around 3.0%. 
• This marks the fourth consecutive reading below the 4.0% target. 

Key highlights of May-25 data

• On a sequential basis, CPI posted a mild increase of 0.21% MoM, compared to the historical average growth of 0.7% recorded in the month of May. 
• Annualised food inflation softened to a 73-month low of 1.50% YoY. 
  1. At a category level, sequentially, the price correction was driven by fruits, pulses, cereals, and spices.
  2. At an individual item level, some of the steepest price correction was seen in the case of Mango, Pointed gourd, Muskmelon, Lady’s Finger, Pineapple, Watermelon, and Onion – all these items recorded a double-digit sequential drop in prices during May 25. 
• Consolidated fuel inflation remained unchanged at 2.3% YoY. Supportive statistical base effect masked the strong sequential build-up in prices for Electricity and LPG that saw a 2.1% and 1.3% MoM jump. To recall, domestic LPG prices were raised by Rs 50 per cylinder in Apr-25, the impact of which is completely on board.
• Core CPI inflation (i.e., CPI ex Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) moderated to 4.3% YoY in May-25 from 4.4% in Apr-25. 
  1. At a sub-category level, the upside seen in Pan, tobacco & intoxicants, Housing, and Personal care & effects was offset by moderation in Household goods & services, and Recreation & amusement. 
  2. Interestingly, the Household goods and services category recorded its first sequential drop in the post-COVID phase. Price correction was primarily driven by Domestic servant/cook (CPI weight: 0.64%), Flowers (CPI weight: 0.09%), and Carpets (CPI weight: 0.002%).

Inference and Outlook

The annualised food inflation has continued to slide lower. This is explained by seven back-to-back (over the Nov-24 to May-25 period) monthly undershooting of sequential momentum in food inflation compared with its long-period trend. Since market participants, including policymakers, form their forecasts based on seasonal behaviour in food prices, large deviations on either side of seasonality give rise to unanticipated outcomes or so-called data surprises. This perhaps explains why headline CPI inflation has surprised on the downside for seven consecutive months in a row.

The degree of underestimation of sequential food price correction over the Nov-24 - May-25 period not just reversed the volatility from an underestimation of the summer food price shock seen earlier between Jun-24 and Oct-24, but it also strengthened the disinflationary trend in the headline inflation. As such, there is a strong likelihood of headline CPI inflation remaining under 3.5% until Dec-25. To be sure, this outturn is premised upon:

• The assumption that rainfall during the ongoing south-west monsoon season would be as per the IMD’s forecast of 6% surplus vs. the long-period average.
• The estimated disinflationary impact of the recently announced Kharif MSPs by the government is minor, at around 10 bps.

Having said that, there could be risks. After an early onset, monsoon performance in June has been underwhelming. On a monthly basis, while rainfall in May-25 recorded a surplus of 98% on account of early pre-monsoon activity, Jun-25 has so far seen a deficit of 33%. Although there is an expectation that rainfall activity will revive adequately in the second half of the month, it remains to be seen if IMD’s monthly forecast of 8% surplus for Jun-25 poses any risk.

Core inflation has been firming up at a slow pace and is likely to range between 4.0-4.6% in the remaining months of FY26 vs. the average of 3.8% in FY25. A moderate upside to core inflation could persist in FY26 on account of:

• Recovery in domestic consumption drivers with support from monsoon, the central government’s provision of income tax relief, and a recent surge in transfer payments by various states. 
• Some, albeit limited, adverse pass-through on account of tariff uncertainty led to supply chain disruptions.
• Price of precious metals is likely to remain firm amidst heightened geopolitical and geoeconomic uncertainty

On a net basis, while we remain cautious on the firmness in core inflation, we believe the disinflationary impact of food inflation, supported by a favourable statistical base, could dominate, thereby keeping headline CPI inflation extremely benign until Dec-25. As such, we now revise lower our FY26 CPI inflation to 3.5% from 3.8% earlier.

Given the front-loading of interest rate cuts as well as provision of sizeable, durable liquidity in the Jun-25 policy review by the RBI, we do not expect the downside risk to FY26 CPI inflation to evoke any immediate policy response for now.

Table 1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket.

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI.

3) Readings under the memo items are derived from imputed indices. Figures have been rounded off.  

Chart 1: Sequentially, momentum in food inflation has undershot its seasonal trend for seven months in a row

Chart 2: Change in Kharif MSPs for AY26 is broadly similar to AY25 levels