India’s Retail Inflation Rises To Three-Month High, Still Below RBI’s Target Band

India’s retail inflation edged higher to 1.33% in December, rising from 0.71% in November, but remained below the Reserve Bank of India’s lower tolerance band of 2% for the fourth consecutive month, government data showed.

Despite the month-on-month increase of 62 basis points, headline inflation continues to stay well under the RBI’s comfort zone of 2–6%, with 4% as the medium-term target, highlighting persistently weak price pressures in the economy.

Food Prices Continue to Drive Disinflation

The moderation in headline inflation was largely driven by continued deflation in food prices, which carry the highest weight in the Consumer Price Index (CPI) basket at nearly 46%.

Food inflation, measured by the Consumer Food Price Index (CFPI), remained in negative territory at –2.71% in December, marking the seventh straight month of food deflation. While this was narrower than November’s –3.91%, it continued to exert downward pressure on overall inflation.

Improved supply conditions, seasonal arrivals of vegetables, and stable cereal and pulse prices contributed to the subdued food price trend, even as the pace of deflation slowed slightly. 

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Urban Inflation Picks Up, Rural Pressures Remain Muted

A closer look at regional data shows diverging inflation trends. Urban retail inflation rose to 2.03% in December from 1.40% in November, reflecting firmer prices in services and non-food categories.

In contrast, rural inflation increased modestly to 0.76% from 0.10%, remaining well below the national average, underscoring uneven demand recovery across regions.

Economists note that while urban price pressures are gradually firming up, rural consumption continues to lag, keeping overall inflation subdued.

Core Inflation Stable, But Demand Remains Soft

Core inflation, which excludes food and fuel, remained broadly stable, indicating limited pricing power among businesses. The absence of strong upward pressure in core categories suggests that consumer demand remains cautious, particularly in discretionary spending segments.

This comes even as the government has rolled out targeted tax relief measures in recent budgets aimed at boosting household consumption.

What It Mean for RBI’s Policy Outlook?

The sustained period of inflation below the RBI’s lower tolerance band strengthens expectations of a continued pause in monetary policy. The central bank has kept interest rates unchanged in recent policy reviews, prioritising inflation durability and financial stability.

However, policymakers are expected to remain cautious. Risks from global commodity prices, crude oil volatility, weather-related food shocks and geopolitical uncertainties could still influence inflation dynamics in the months ahead.

The RBI has repeatedly indicated that policy decisions will depend not just on headline inflation prints but on whether inflation remains durably aligned with the 4% target.

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