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May’25 inflation at 75-month low

Led by significant easing in food inflation

* Headline CPI inflation came down to a 75-month low of 2.8% YoY in May’25 vs. 3.2% in Apr’25. The deceleration was entirely driven by 43-month slowest growth in food inflation (1% in May’25 vs. 1.8% in Apr’25). It was partly offset by higher core inflation, which grew at a 19-month high pace of 4.2%. On a sequential basis, inflation increased 0.2% in May’25 vs. an increase of 0.3% in Apr’25. The inflation number was lower than the market consensus of 3% and our forecast of 2.9%.

* Food inflation came down to 1% YoY in May’25 (lowest in 43 months) vs. 1.8% in Apr’25. Details suggest that lower food inflation (vs. last month) was mainly attributed to the 39-month slowest increase in prices of cereals, the fourth consecutive and sharper contraction in prices of pulses (-8.2% in May’25 vs. -5.2% in Apr’25), and the fourth consecutive contraction in prices of vegetables (-13.7% in May’25 vs. -11.0% in Apr’25). On the other hand, inflation in oils and fats inched up to a 38-month high of 17.9% in May’25 vs. 17.4% in Apr’25. Additionally, growth in prices of protein-rich items such as milk products was at a 14-month high during the month. CPI, excluding veggies, remained elevated at 4.0% in May’25, though slightly lower than 4.1% in Apr’25 (Exhibit 2).

* Notably, fuel and light inflation rose by 2.8% in May’25 compared with an increase of 2.9% in Apr’25. Core CPI inched up to a 19-month high of 4.2% YoY compared with 4.1% in Apr’25.

* Rural inflation eased to 2.6% in May’25 from 2.9% in Apr’25, while urban inflation softened to 3.1% from 3.4%. ? Other details suggest that: 1) Services inflation remained elevated at 3.9% YoY in May’25, while goods inflation came down to a 62-month low of 2.5% in May’25; 2) Imported inflation stood at 6.9% in May’25, while domestically generated inflation came down to 2.3% (Exhibit 3); and 3) Details confirm that as much as 69% (all-time low) of the CPI basket posted less than 4% inflation in May’25 (vs. 63% in Apr’25) (Exhibit 4).

* Last week, the Reserve Bank of India (RBI) revised its retail inflation projection for FY26 to 3.7%, down from its earlier estimate of 4%. This marks the lowest average retail inflation forecast by the central bank in recent years.

* Way forward: Overall, the headline inflation came broadly in line with our expectations. High-frequency data shows that prices of vegetables and fruits have started surging, offsetting the downward trend visible in cereals and pulses. The food inflation outlook remains soft on the back of above-normal monsoon, and core inflation is expected to remain benign amid an easing in international commodity prices in line with the anticipated global growth slowdown. We believe that while the overall inflation trajectory is expected to remain benign, the recent frontloaded policy actions and the guidance of limited room for incremental easing suggest a prolonged pause for now, with further actions to be highly dependent on data.

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