Inflation Trends in India 2025-26: Historic Low Analysis from Economic Survey 2025-26
Inflation in India has reached historic lows in FY26, providing significant macroeconomic benefits and policy space. The Economic Survey 2025-26 documents this achievement, analyzing the factors behind the sharp decline and its implications for monetary policy and growth. This article examines India's inflation dynamics and their significance for economic policy.
Historic Low: 1.7% CPI Inflation
According to the Economic Survey 2025-26, headline CPI inflation declined to 1.7 per cent during April-December FY26. This represents the lowest reading in the current CPI series that began in 2012.
To put this in perspective, India has historically grappled with inflation. The 4 per cent inflation target with +/-2 per cent band was often tested on the upside. Inflation above 6 per cent was common in many years, causing hardship to households and constraining monetary policy.
The decline to 1.7 per cent – well below the lower bound of the target range – represents a fundamental shift in inflation dynamics.
Drivers of the Decline
The Economic Survey 2025-26 attributes the inflation decline to several factors:
Food Price Correction: Food constitutes nearly half of India's CPI basket. Prices of vegetables and pulses, which had caused inflation spikes in previous years, corrected significantly. This was driven by favorable agricultural conditions, timely supply interventions, and a supportive base effect.
Favorable Monsoon: Good rainfall supported agricultural production, ensuring adequate food supplies and moderating prices.
Supply-Side Interventions: Government measures including buffer stock operations, trade policy adjustments (export restrictions, import duty reductions), and price monitoring helped contain food inflation.
Base Effect: High prices in the previous year created a favorable comparison base, contributing to lower year-on-year inflation readings.
Global Commodity Prices: Moderation in global crude oil and commodity prices reduced input cost pressures.
Food Inflation: The Dominant Factor
Food inflation has historically been the primary driver of overall inflation volatility in India. The Economic Survey 2025-26 notes "a sharp disinflation in food prices" as the key factor behind headline inflation decline.
Within food, certain categories showed outright deflation (price decline):
- Vegetables experienced significant price correction
- Pulses prices declined after earlier spikes
- Edible oils moderated with improved global supplies
The moderation in these volatile categories had an outsized impact on overall inflation given their substantial weights in the CPI basket.
Core Inflation: A Different Picture
While headline inflation fell sharply, the Economic Survey 2025-26 notes that core inflation (excluding food and fuel) "has exhibited persistence." The survey observes that core inflation rose from 3.5 per cent to 4.3 per cent.
However, this apparent rise in core is largely explained by precious metals – gold and silver prices surged significantly during the year. When gold and silver are excluded from core, "the core excluding gold/silver is declining," indicating improving underlying supply conditions.
This distinction is important for monetary policy. Rising core due to demand pressures would warrant concern. Rising core due to gold prices – which are driven by global safe-haven demand and currency movements – is less concerning from a domestic demand perspective.
Regional Convergence
The Economic Survey 2025-26 discusses regional inflation dynamics. State-level inflation data shows convergence, with previously high-inflation states experiencing faster moderation.
This regional convergence reflects improved market integration through GST, better logistics infrastructure, and more effective supply management. When markets are integrated, local price shocks get arbitraged away more quickly.
Implications for Monetary Policy
Low inflation has significant implications for RBI's monetary policy:
Policy Space: With inflation well below target, RBI has room to maintain an accommodative stance focused on growth support.
Rate Cuts: The survey notes that RBI cut rates aggressively in 2025. Low inflation validates this approach and potentially allows further easing.
Credibility: Successfully achieving low inflation enhances RBI's credibility, helping anchor inflation expectations.
However, the survey implicitly cautions against assuming permanent low inflation. Food prices can reverse quickly with adverse weather or supply disruptions. Policy must remain vigilant.
Deflation Concerns?
Inflation at 1.7 per cent raises a different question: is deflation a concern? Deflation (falling prices) can be problematic if it reflects weak demand, postpones purchases, and increases real debt burdens.
India's situation does not appear deflationary in this sense. Economic growth remains strong, demand is robust, and the low inflation reflects supply-side improvements rather than demand weakness. The inflation decline is "disinflation" (falling inflation rate) rather than "deflation" (falling price level).
WPI and CPI Comparison
The survey examines both Consumer Price Index (CPI) and Wholesale Price Index (WPI). WPI measures prices at the wholesale level and has different composition than CPI. WPI inflation has also moderated, reflecting lower input costs for businesses.
When WPI is lower than CPI, it typically signals improving profit margins for manufacturers. This supports corporate earnings and investment capacity.
UPSC Relevance: Inflation
Inflation is a perennial UPSC topic:
- GS-III: Inflation, monetary policy, price indices
- Economy Optional: Inflation theory, measurement, control
- Current Affairs: Recent inflation trends
Practice MCQs on Inflation - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, headline CPI inflation during April-December FY26 was:
(a) 1.7%
(b) 3.5%
(c) 4.2%
(d) 5.8%
Answer: (a) 1.7%
Q2. The 1.7% inflation represents:
(a) Average historical level
(b) Highest in a decade
(c) Lowest in the current CPI series
(d) Target level
Answer: (c) Lowest in the current CPI series
Q3. The primary driver of headline inflation decline was:
(a) Energy prices
(b) Food prices
(c) Housing costs
(d) Services inflation
Answer: (b) Food prices
Q4. According to Economic Survey 2025-26, core inflation's apparent rise is largely explained by:
(a) Housing demand
(b) Service sector wages
(c) Gold and silver prices
(d) Transportation costs
Answer: (c) Gold and silver prices
Q5. India's inflation targeting framework targets inflation at:
(a) 2%
(b) 4%
(c) 6%
(d) 8%
Answer: (b) 4% with tolerance band of +/-2%
Conclusion
The historic low inflation of 1.7 per cent documented in the Economic Survey 2025-26 represents a significant macroeconomic achievement. Driven primarily by food price correction through favorable agricultural conditions and supply-side management, this inflation environment provides policy space for growth support and enhances economic stability. However, the survey's careful analysis of core inflation dynamics and regional patterns reminds us that vigilance remains essential, as inflation can return quickly with supply disruptions or global commodity shocks.