Opinion: Softening inflation can spur growth

However, summer heat poses high upside risks to food prices in addition to elevated geopolitical risks and tariff war

Published Date – 23 May 2025, 07:19 PM

By Dr K Srinivasa Rao

It is noteworthy that the annual CPI (consumer price index) inflation rate in India fell to 3.16 per cent in April from 3.34 per cent recorded in March 2025. According to the regional inflation data, the rural inflation is 3.25 per cent while the urban inflation is a notch higher at 3.43 per cent. The CPI inflation is the lowest since July 2019, bringing cheer to the industry with prospects of further rate cuts in 2025 and buoyant liquidity.

The simultaneous deceleration of the WPI (wholesale price index) from 2.05 per cent in March to 0.85 per cent in April affirms the downward trend. Sustained softer inflation prompts a lower interest rate regime and easy money policy to stimulate growth.

The last mile of the disinflation process was challenging, but the softening of food inflation could strengthen its descent. Food inflation at 8.7 per cent in April 2024 came down significantly to 1.78 per cent by April 2025, as against CPI inflation descending from 4.83 per cent to 3.16 per cent in the same period. With the summer heat and supply-side conditions of vegetables, the upside risks to food inflation are high. The elevated geopolitical risks and the tariff war could continue to threaten the inflation trajectory.

The descent of inflation was consistent in 2025, slowing down to 4.3 per cent in January, 3.6 per cent in February, 3.3 per cent in March, and 3.16 per cent in April

Ever since the flexible Inflation targeting (FIT) framework was adopted in 2016, the Reserve Bank of India (RBI) is mandated to monitor the CPI inflation within a glide path of +/-2 per cent over 4 per cent. The CPI inflation should be contained between 2 per cent and 6 per cent. However, the RBI prefers it at a midpoint of 4 per cent.

Softer interest rates bring down the cost of borrowing for the corporate sector, inducing capacity expansion. It can revive private investments, and facilitate faster infrastructure development adding accelerated economic activity. Such enhanced growth dynamics can create new employment opportunities. It further lowers retail borrowing costs for individuals, along with lower EMIs. Higher employment opportunities, more money with individuals due to lower EMI commitments and lower cost of living (due to low inflation) can fuel consumption. The combined synergy of lower inflation and a softer interest rate regime can stimulate growth.

Inflation dynamics after Pandemic

At the threshold of the revival of growth from the low recorded during the pandemic in 2020-21, the inflation shot up to a high of 7.79 per cent in April 2022 on the back of easy money policy, global supply-side disruptions and the impact of the Russia-Ukraine war. Stubborn and persistent inflation dispelled the opinion of policymakers that its spike was transitory. As a result, the RBI, in an off-cycle monetary policy meeting on May 4, 2022, raised the repo rate (the rate at which it lends to banks) from 4 per cent to 4.40 per cent to tame inflation.

Thus, the fight against inflation to support medium-term growth prospects began with multiple strategies shifting from an easy to a dear money policy. Steadily increasing repo rates, reining in the flow of liquidity, balancing the exchange rate interventions and many other associated measures were implemented to anchor inflation expectations.

In the process, the repo rates reached a high of 6.5 per cent by February 2023, with an incremental increase of 250 basis points, and remained high until the interest rate curve started to descend after inflation began to soften. The first repo rate cut in the current rate cycle was on February 7, 2025, when it was brought down from 6.5 per cent to 6.25 per cent and later to 6 per cent in April 2025.

Such well-aligned policy interventions could bring the inflation down, below the midpoint of the FIT target of 4 per cent, creating a growth-induced ecosystem. The moderation of inflation began in November 2022 when it came down to 5.85 per cent, below the upper end of the FIT target. Average inflation during 2023 was 5.7 per cent, and 4.9 per cent in 2024. The descent of inflation was consistent in 2025, slowing down to 4.3 per cent in January, 3.6 per cent in February, 3.3 per cent in March and 3.16 per cent in April. The WPI also moved down in tandem. The slide in inflation stepped up the prospects of growth evidencing the effectiveness of policy measures and efficiency of its transmission.

GDP Trends

From -5.9 per cent during FY21 due to the pandemic, the ascent of GDP growth began following well-balanced, consistent policy interventions and the rollout of the multipronged Atmanirbhar Bharat Yojana. The coordination between fiscal and monetary policy measures had a significant role in providing resilience to the economy.

The GDP bounced back to 9.1 per cent growth in FY22 due to a low base in the previous year and robust economic recovery. The tempo of recovery continued, taking the GDP growth to 7.2 per cent in FY23, which went up to 8.2 per cent in FY24. The advanced estimate of GDP for FY25 is at 6.4 per cent. The real GDP growth is expected to exceed 6.5 per cent in fiscal 2025-26, supported by higher government capex and consumption boost from tax cuts and interest rate reductions. As a result of increased economic activity, the annual GST collections went up from Rs 14.76 lakh crore in FY22 to Rs 22.08 lakh crore in FY25.

Against the backdrop of the favourable ecosystem, the IMF has pegged its outlook of India’s GDP growth at 7 per cent for FY25 and 6.5 per cent for FY26. The World Bank estimate is at 7 per cent for FY25, and 6.7 per cent for FY26 and FY27. The GDP outlook of RBI for FY26 stands at 6.5 per cent.

Way forward, with the inflation trajectory continuing its descent, the interest rates will go down further opening up new vistas of growth supported by renewed investment opportunities and accelerated economic growth. The GDP outlook estimated earlier may stand revised upwards as the rate cuts further deepen in the coming months despite the uncertain global economy and looming geopolitical risks.