Inflation dips to 2.82% in May, the lowest in over 6 years

New Delhi: India’s annual retail inflation declined below 3 per cent in May for the first time in over six years led by a sharp fall in prices of several food items, data released by the National Statistics Office showed on Thursday.

The Consumer Price Index (CPI) based retail inflation, which the Reserve Bank of India (RBI) monitors for its policy action, declined to 2.82 per cent in May from 3.16 per cent in the previous month. This is the lowest level in 75 months.

Price of vegetables dipped by 13.7 per cent and pulses by 8.2 per cent during the month under review, year-on-year. Spices became cheaper by 2.82 per cent. Price of meat and fish was also lower in May when compared with the same month last year.

Food inflation, which accounts for nearly half of the CPI basket, declined to 0.99% in May from 1.78 per cent in the previous month.

Positive data on price rise front comes just days after the RBI cut policy repo rate by 50 basis points to 5.5 per cent, signalling pivot from inflation control to supporting growth.

“The benign inflationary expectations justify RBI’s quest to support the momentum in capital formation for more durable growth,” SBI Research said in a note.

"Given the current inflation trajectory, we expect headline inflation to average 4 per cent this fiscal, compared with 4.6 per cent in the previous one," said Dipti Deshpande, Principal Economist, Crisil.

Lower inflation keeps the window open for one more repo rate cut by the Reserve Bank of India over the reduction of 100 basis points announced so far, Deshpande added.

While overall CPI inflation has moderated continuously since October 2024, the core inflation (CPI excluding food and fuel) remains sticky. Core retail inflation edged up to 4.2 per cent in May, second-highest in the last 19 months.

Rise in core inflation is indicative of steady demand conditions in the economy, said Paras Jasrai, Associate Director at India Ratings and Research.

The imported inflation rose to 6.3 per cent in May driven by the jump in the prices of oils and fats.

The decline in inflation was sharper in urban areas. Rural inflation in May stood at 2.6 per cent, which is 48 basis points lower than the urban inflation. “This would further amplify the pick-up in the rural demand which is showing signs of recovery with a sustained positive real rural wage growth,” said Jasrai.

Despite the sharp decline in inflation, the RBI is expected to keep policy repo rate unchanged in its August policy review, analysts said.

“While the overall inflation trajectory is expected to remain benign, the recent frontloaded policy actions and the guidance of limited room for incremental easing suggests prolonged pause for now, with further actions being highly data dependent,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

“We expect a pause in rate action here onwards till the December 2025 policy though a lot will depend upon incoming data,” said SBI Research.