India’s retail inflation has dropped to an over eight-year low of 1.54% in September, led by persistent cooling in food prices.

Marking the lowest inflation level since 2017, the latest print will encourage the RBI-led monetary policy committee (MPC) to go for an interest-rate cut in December. For the last two policies, the central bank has left the repo rate unchanged at 5.5%.

The new consumer price index (CPI) based inflation numbers compare with 2.07% in the preceding August month and 5.49% in September 2024.

Inflation has stayed below the Reserve Bank of India’s (RBI) medium-term target of 4% for seven months in a row.

Food inflation, which accounts for nearly half of the CPI basket, decreased to -2.28% in September from a decline of 0.69 last month. It stood at 9.24% in September last year.

"The decline in headline inflation and food inflation during September 2025 is mainly attributed to favourable base effect and decline in inflation of vegetables, oil and fats, fruits, pulses and products, cereal and products, egg, fuel and light," the National Statistics Office (NSO) said in a statement.

In its October bi-monthly monetary policy, the RBI lowered its inflation projection for 2025-26 to 2.6% from 3.1% it had forecast in August.

“The soft September CPI inflation continues to point towards the persistence of benign inflationary environment. While much of the moderation has been led by food prices, the core inflation has surged due to housing. We expect the pass through of GST cut to be more visible in the upcoming October reading likely pushing the print to sub-1%," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Inflation rates for rural and urban are -2.17% and -2.47%, respectively.

Analysts say the RBI could lower the interest rate by 25 basis points in its December bi-monthly monetary policy even as the outlook on inflation stays benign. Ratings agency ICRA expects the CPI inflation to average 2.6% in FY2026, dampened by the GST rationalisation as well as the continued benign food prices.

“We believe that a final 25 bps rate cut is possible in December 2025. with its timing contingent on the degree of further transmission of the cumulative 100 bps rate cuts to the credit market, as well as the growth implications of the GST rejig and tariffs. We expect downward revisions in the expected growth trajectory to drive the rate cut decision, rather than the benign CPI inflation outlook, with the latter being driven by tax policy changes and not weaker demand," said Aditi Nayar, chief economist at ICRA.

Bhardwaj expects the repo rate to drop but the timing would depend on certain factors. "Overall, the benign inflation and growth trajectory does provide room for 25-50bp rate cuts. However, the festive linked surge in retail sales may make it difficult to gauge the underlying sustainable demand in the economy and hence the timing of easing may become more difficult," she said.