Low Inflation Is No Longer Comforting and May Signal Demand Stress in India
India’s unusually low inflation is no longer an unqualified positive and may instead be pointing to deeper demand-side stress in the economy, according to Nagesh Kumar, external member of the Reserve Bank of India’s Monetary Policy Committee (MPC). While subdued inflation offers policy space for interest rate cuts, Kumar cautioned that inflation falling below the RBI’s lower tolerance band raises concerns for a developing economy like India.
Speaking on the evolving macroeconomic situation, Kumar said headline inflation has slipped into territory that is “too low for comfort,” suggesting that underlying demand may be weakening even as price pressures ease.
CPI Inflation Breaches Lower Tolerance Band for Third Straight Month
India’s retail inflation has remained below the RBI’s lower tolerance threshold of 2 percent for three consecutive months, underscoring the MPC member’s concerns.
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September CPI inflation: 1.44 percent
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October CPI inflation: 0.3 percent
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November CPI inflation: 0.7 percent
These readings mark a clear breach of the flexible inflation targeting framework’s lower bound and reflect a sharp cooling in prices driven largely by easing food inflation and favourable base effects.
“Not only does the current inflation rate provide policy space for a cut, but it is actually too low for comfort,” Kumar said. “Too low an inflation rate is not healthy for a developing country like India, as it suggests a demand deficit.”
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Food Inflation, Base Effects and GST Cuts Drive the Decline
The sharp moderation in headline CPI inflation has been aided by multiple factors working simultaneously. Food prices, which carry a significant weight in the inflation basket, have softened materially in recent months. Additionally, favourable base effects have further dragged down year-on-year inflation readings.
Kumar pointed out that continued GST rate cuts passing through to retail prices have also contributed to lower inflation outcomes. As a result, headline CPI inflation has averaged just 1.8 percent so far this year, well below the RBI’s mandated target range of 2–6 percent.
While such benign inflation is often celebrated as a “Goldilocks” scenario, Kumar cautioned that the underlying growth dynamics tell a more complex story. source: Moneycontrol
From Goldilocks to Growth Concerns
Kumar noted that optimism around a phase of high growth and low inflation began to fade when data for October 2025 suggested that economic activity may have already peaked in the second quarter.
“The celebrations of this ‘Goldilocks moment’ were tempered by trends for October 2025, which suggested that economic activity had peaked in Q2,” he said.
This divergence between low inflation and moderating growth is particularly concerning because it points to weakening demand rather than productivity-driven disinflation.
Business Sentiment Shows Signs of Moderation
Adding to the cautionary signals, RBI’s own Industrial Outlook Surveys indicate a moderation in business assessment and future expectations. Firms appear more guarded in their outlook, reflecting uncertainty around both domestic and global factors.
According to Kumar, geopolitical developments have started to weigh meaningfully on sentiment. “It is clear that geopolitical uncertainties, including those concerning the high Trump tariffs imposed on India, and the delays in concluding negotiations to address them, have begun to hurt business confidence,” he said.
Trump Tariffs Hit Labour-Intensive MSME Sectors Hardest
Kumar highlighted that the impact of US tariffs is being felt most acutely in labour-intensive sectors that have high exposure to American markets.
Key affected industries include:
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Textiles and garments
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Leather goods
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Gems and jewellery
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Processed food products such as shrimp
“These sectors are dominated by MSMEs and account for a disproportionately larger share—around 40 percent—of manufacturing employment,” Kumar said. Prolonged weakness in these industries could therefore have broader implications for jobs and income growth.
Anchored Inflation Expectations Create Policy Space
Despite concerns around demand stress, Kumar stressed that inflation expectations in India remain firmly anchored. This gives the RBI flexibility to pivot towards growth-supportive policies without risking a sharp rise in prices.
“Headline inflation is not just comfortably low; it has slipped into uncomfortable territory,” he noted, adding that this strengthens the case for calibrated policy easing.
Importantly, Kumar emphasised that the MPC has identified a clear need to support growth through demand stimulus, particularly to preserve momentum in the second half of the current financial year.
Case for Coordinated Fiscal and Monetary Support
Kumar argued that monetary easing alone may not be sufficient to revive demand meaningfully. Instead, he called for a coordinated approach between fiscal and monetary authorities to maximise impact.
“The growth stimulus should be coordinated across fiscal and monetary policy actions to be effective,” he said.
Such coordination could involve:
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Lower interest rates to encourage borrowing and investment
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Targeted fiscal support for vulnerable sectors and MSMEs
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Measures to boost consumption and restore business confidence
What This Means for Investors and Markets
For investors, Kumar’s comments signal a potential shift in the policy narrative—from inflation control to growth support. Persistently low inflation strengthens expectations of rate cuts, which could be supportive for equities, especially interest-rate-sensitive sectors such as banking, real estate and consumption-driven businesses.
However, the warning on demand stress also underscores the need for caution. Growth-linked sectors may remain sensitive to earnings downgrades if consumption and exports fail to revive meaningfully.
As India navigates this delicate phase, markets will closely track upcoming inflation prints, growth indicators and policy signals from the RBI to gauge how quickly and decisively authorities move to address emerging demand-side challenges.
