India’s CPI inflation decelerated to a 99-month low of 1.54% YoY in Sep-25 from 2.07% in Aug-25. Although market participants had expected inflation to moderate sequentially, the final print posted a downside surprise vis-à-vis the Reuters median poll expectation of 1.7%. With this, the CPI inflation stands at 1.7% in Q2 FY26, recording its lowest quarterly print in the current data series - notably, it also registered its first quarterly breach of the lower policy tolerance of 2%. 

Key highlights of Sep-25 data

• The headline CPI posted a sequential increase of 0.10% MoM, lower than the median increase of 0.52% usually associated with the month of September. 
• Food and beverages inflation slipped back into negative territory with an 81-month low annualized print of -1.37%. 
  1. Sequentially, the deceleration was led by the subcategories of Vegetables (-3.2% MoM), Fruits (-1.6% MoM) and Pulses (-0.3% MoM). There was a partial offsetting impact seen in price increases for subcategories like Eggs (1.3% MoM), Meat & fish (0.7% MoM), and Oils & fats (0.5% MoM). 
  2. At an item-wise level, Tomato, Pear, and Apple witnessed double-digit price correction in Sep-25 over Aug-25.
• Consolidated fuel inflation moderated to 1.6% YoY from 1.9% in the previous month. This marked the lowest level in the last 6 months. A sequential decline was seen in the price of Electricity, Kerosene, and Firewood and chips. 
• In contrast to the downward trend in food and fuel inflation, Core CPI inflation (represented by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) rose somewhat sharply to 4.8% YoY from 4.3% in the previous month. This marks the highest level of core inflation in the last 25 months. 
  1. This upside in core inflation was predominantly driven by an increase in the price of jewellery items that reflect the combined impact of a sharp spike in the price of precious metals along with a spillover impact of rupee depreciation. Excluding the impact of jewellery items, the increase in core inflation was modest – 3.3% YoY in Sep-25 vs. 3.2% in Aug-25.
  2. Besides jewellery items, housing rent displayed non-seasonal hardness.

Inference and Outlook

The food-led comfort continues to underpin the trajectory of headline CPI inflation.  

Looking ahead, the outlook on food prices for the near-term remains benign amidst a surplus monsoon outturn (rainfall between Jun-Sep 2025 clocked a surplus of 8% vs. the long-period average) and a restrained increase in the Kharif and Rabi MSPs (which, as per our estimates, would impart a 10 bps disinflationary impulse at the headline level).  

Moving beyond the food comfort, we note that the GST restructuring (effective since Sep 22^nd) will impart a strong disinflationary impulse to CPI inflation over H2 FY26 and H1 FY27. The revised tax structure with just two standard slabs (5% and 18%) vs. the earlier regime of four slabs (5%, 12%, 18%, and 28%) is expected to lower the price of essentials, healthcare, FMCG products, consumer durables, and select services. As per our estimates, the potential imputed disinflationary impact on CPI inflation could be of the order of 132 bps on an annualized basis. Having said, we believe the actual pass-through would be lower depending upon the treatment of inventories and input tax credits, and usual transmission losses associated with tax cuts.

With continuous downward surprises in successive CPI inflation readings, the overall inflation outlook remains extremely benign. However, there are emerging upside risks that one needs to be watchful of:  

• The skewness in the geographical distribution of southwest monsoon rains worsened towards the end of the season, with instances of heavy and unusual rains in select places harming the outstanding kharif produce.
• In addition, the withdrawal of monsoon does not appear to be complete – the month of October has so far witnessed a surplus rainfall of 35% vs. the long period average.
• The 3.8% depreciation in the INR is likely to add to inflationary pressures with a lag. As per the RBI’s estimates, a 5% depreciation in the rupee could increase CPI inflation by 35 bps via the import channel.
• The elevated geoeconomic and geopolitical uncertainty is fueling precious metal prices – gold and silver are up by 33% and 47% on a FYTD basis, respectively. 
• The anticipation of recovery in domestic consumption, supported by tax cuts by the central government, overall surplus monsoon, and the ongoing surge in transfer payments by several state governments, could provide firmness to core inflation over the medium term.

Although there is a strong likelihood that CPI inflation could dip below the 1% level in Oct-25, thereby providing a downside risk to our FY26 CPI inflation estimate of 2.6%, we retain our forecast nonetheless, amidst the emergence of the upside risks as discussed above.

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: Quarterly CPI inflation breached the lower tolerance threshold for the first time since the RBI adopted the flexible inflation targeting framework