India CPI Inflation: Softer Data Signals Sustained RBI Policy Pause – MUFG Analysis

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India CPI Inflation: Softer Data Signals Sustained RBI Policy Pause – MUFG Analysis

NEW DELHI, March 2025 – India’s latest Consumer Price Index (CPI) data reveals a continued softening trend, providing the Reserve Bank of India (RBI) with substantial justification to maintain its current monetary policy stance. According to analysis from Mitsubishi UFJ Financial Group (MUFG), this persistent disinflationary momentum strengthens expectations for an extended policy pause through mid-2025. The March inflation figures, released by India’s Ministry of Statistics and Programme Implementation, show headline CPI moderating to 4.2% year-on-year, marking the third consecutive month within the RBI’s 2-6% target band.

India CPI Inflation: Analyzing the March 2025 Data

India’s consumer price index displayed notable moderation across multiple components in March 2025. Food inflation, historically volatile in the Indian context, decelerated to 5.8% from February’s 6.1%. Core inflation, which excludes food and fuel, declined to 3.4%, reaching its lowest level since September 2020. This broad-based disinflation reflects several structural factors:

• Agricultural production improvements following favorable monsoon seasons
• Supply chain normalization post-pandemic disruptions
• Moderating global commodity prices affecting imported inflation
• Base effects from elevated inflation readings in 2023-2024

The geographical distribution shows urban CPI at 4.0% and rural CPI at 4.4%, indicating narrowing differentials between regions. Furthermore, the weighted contribution analysis reveals that food and beverages contributed 47% to overall inflation, down from 52% in the previous quarter.

RBI Monetary Policy Framework and Current Stance

The Reserve Bank of India operates under a flexible inflation targeting framework, with a mandate to maintain CPI inflation at 4% within a ±2% tolerance band. Since April 2023, the Monetary Policy Committee (MPC) has maintained the repo rate at 6.50% through eight consecutive meetings. This extended pause follows 250 basis points of cumulative tightening between May 2022 and February 2023. The current policy stance remains “withdrawal of accommodation,” signaling continued vigilance against inflationary pressures while acknowledging growth considerations.

Recent MPC statements emphasize data-dependent decision-making, with particular attention to:

• Food price volatility and monsoon performance
• Global financial conditions and currency stability
• Fiscal policy coordination with government measures
• Growth-inflation tradeoffs in emerging market context

The central bank’s liquidity management operations have complemented rate policy, with the weighted average call rate consistently aligning with the policy corridor.

MUFG’s Expert Analysis and Economic Projections

Mitsubishi UFJ Financial Group’s research division provides comprehensive analysis of India’s inflation trajectory and policy implications. Their March 2025 assessment highlights several critical factors supporting continued policy stability. According to MUFG economists, the disinflation process has gained “credible momentum” but remains vulnerable to exogenous shocks. The analysis specifically notes:

“The moderation in core inflation to 3.4% represents a significant milestone for India’s price stability objectives. This development, combined with anchored inflation expectations in the RBI’s surveys, provides the MPC with enhanced flexibility to support growth objectives without compromising inflation targets.”

MUFG projects average CPI inflation of 4.5% for fiscal year 2025-26, with the RBI maintaining current rates through September 2025. Their baseline scenario assumes normal monsoon conditions, stable crude oil prices around $75-80 per barrel, and continued fiscal consolidation. The analysis further identifies three potential risk scenarios:

Comparative Analysis with Global Emerging Markets

India’s inflation trajectory compares favorably with peer emerging market economies in early 2025. While many central banks in Latin America and Eastern Europe continue grappling with elevated price pressures, India’s disinflation has progressed more steadily. Brazil’s IPCA index remains above 5%, Turkey’s inflation exceeds 40%, and Argentina faces triple-digit inflation. Among major Asian emerging markets, only China and Thailand report lower inflation rates than India.

This relative outperformance stems from multiple factors:

• Effective supply-side interventions by Indian authorities
• Early and aggressive monetary tightening in 2022-2023
• Favorable terms of trade from services exports
• Strategic food stock management through buffer operations

The RBI’s policy credibility, as measured by inflation expectation surveys, has improved significantly since the implementation of flexible inflation targeting in 2016.

Transmission Mechanisms and Real Economy Impacts

Monetary policy transmission in India operates through multiple channels affecting the broader economy. The interest rate channel has seen lending rates increase by 180-220 basis points across categories since tightening began. Credit growth has moderated from 17.2% in early 2023 to 14.8% in March 2025, indicating effective transmission. The exchange rate channel has provided additional stabilization, with the rupee depreciating only 3.2% against the dollar in the past year despite global volatility.

Real economy impacts manifest across sectors differently. Interest-sensitive industries like automobiles and housing have experienced moderated growth, while services and infrastructure continue expanding robustly. The policy pause since April 2023 has provided stability for investment planning, with corporate bond issuance increasing 22% year-on-year in the first quarter of 2025.

Historical Context and Inflation Evolution

India’s inflation management represents a substantial improvement from historical patterns. During 2010-2014, average CPI inflation exceeded 9%, with frequent spikes above 10%. The establishment of the Monetary Policy Committee in 2016 institutionalized inflation targeting, leading to gradual anchoring of expectations. The COVID-19 pandemic caused temporary disruptions, with inflation breaching the 6% upper tolerance briefly in 2022 before the current disinflation phase.

Structural reforms have contributed significantly to this transformation:

• Goods and Services Tax (GST) implementation reducing cascading taxes
• Agricultural market reforms improving supply chains
• Digital payment infrastructure enhancing monetary policy transmission
• Inflation-targeting framework providing clear policy anchor

These developments have reduced India’s inflation volatility from among the highest in emerging markets to near the median.

Conclusion

India’s softer CPI inflation data for March 2025 reinforces the case for sustained RBI policy stability. The broad-based disinflation, particularly in core components, provides the Monetary Policy Committee with enhanced flexibility to support growth objectives while maintaining price stability. MUFG’s analysis correctly identifies the combination of favorable supply conditions, effective policy transmission, and anchored expectations as supporting extended policy pause. As India navigates global uncertainties and domestic priorities, the current inflation trajectory offers welcome breathing space for balanced policy management. The coming months will test the durability of this disinflation, with monsoon performance and global commodity prices representing key monitoring variables for policymakers and market participants alike.

FAQs

Q1: What is India’s current CPI inflation rate?
India’s Consumer Price Index inflation moderated to 4.2% year-on-year in March 2025, marking the third consecutive month within the RBI’s 2-6% target band.

Q2: How does MUFG analyze India’s inflation situation?
MUFG’s analysis highlights credible disinflation momentum but notes vulnerability to exogenous shocks. They project average CPI of 4.5% for FY2025-26 and expect policy rates to remain unchanged through September 2025.

Q3: What factors are contributing to India’s softer inflation?
Multiple factors contribute including improved agricultural production, normalized supply chains, moderating global commodity prices, favorable base effects, and effective monetary-fiscal policy coordination.

Q4: How does India’s inflation compare with other emerging markets?
India’s inflation trajectory compares favorably, with only China and Thailand among major Asian emerging markets reporting lower rates. Many Latin American and Eastern European economies face substantially higher inflation.

Q5: What are the risks to India’s inflation outlook?
Primary risks include adverse monsoon conditions affecting food prices, global commodity price spikes, exchange rate volatility, and potential fiscal slippages. The RBI monitors these factors closely in its policy decisions.

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