‘Old’ CPI inflation rises to 1.33% in December, ends 2025 outside RBI target range

Policy impact

At 1.33 per cent, the latest headline inflation print is broadly along expected lines and takes the average for the last quarter of 2025 to 0.8 per cent, slightly higher than the Reserve Bank of India’s (RBI) forecast of 0.6 per cent.

The Indian central bank, which has a legal mandate to target 4 per cent inflation in the medium term in a band of 2-6 per cent, cut the policy repo rate by 125 basis points (bps) in 2025 to 5.25 per cent in response to record-low price increases. In fact, the December CPI inflation figure is the 11th month in a row that it has come in lower than RBI’s target.

The RBI expects inflation to rise further in the coming months and average around 4 per cent in the first half of 2026-27. However, this forecast does not take into account the changes that will be incorporated in the new CPI inflation series.

The central bank’s Monetary Policy Committee (MPC) is scheduled to next meet from February 4-6, days after the Union Budget for 2026-27 will be presented in Parliament on February 1. Inflation data for January as per the new CPI series will be released on February 12.

“With this print, October–December CPI inflation averaged at ~0.8 per cent, nearly 20 basis points (bps) higher than MPC’s Q3FY26 forecast. We believe the RBI will see a similar upside to their Q4FY26 CPI forecast too (2.9 per cent), and accordingly, we expect a pause in the February 6 MPC meeting,” Barclays’ economists Aastha Gudwani and Amruta Ghare said in a note.

December inflation internals

While the year-on-year decline in food prices in December was smaller than in November – helping push inflation higher – the Consumer Food Price Index was down 0.2 per cent on a month-on-month basis on the back of a sequential decline in the prices of vegetables (down 2.9 per cent), fruits (down 0.9 per cent), and cereals (down 0.1 per cent), aided by a favourable kharif sowing season.

Despite a fall in prices of vegetables in December from November, an unfavourable base effect meant vegetable inflation – which measures the change in price compared to the same month last year – rose. In December, vegetable inflation was (-)18.47, implying vegetable prices were 18.47 per cent lower in the last month of 2025 compared to the last month of 2024. In November, vegetable inflation was (-)22.24 per cent. As such, vegetable prices were lower by a smaller margin in December.

Cereals inflation, meanwhile, fell below zero in December for the first time since September 2021. According to Paras Jasrai, Economist at India Ratings & Research, while this trend might be a positive for households, it “can be worrisome from the farmers point of view which can disrupt the gradual narrowing between rural-urban consumption gap”.

Precious metals keep rising

While the Consumer Food Price Index was down on a month-on-month basis, the index for clothing and footwear was up 0.2 per cent in December compared to November, housing was down 0.8 per cent, and fuel and light was up 0.3 per cent.

The index for the ‘miscellaneous’ category of items of the CPI – which contains household goods and services – rose 0.7 per cent month-on-month in December, driven primarily by the surge in gold and silver prices.

The existing CPI basket contains 299 items, two of which are gold and silver. While these two items together make up only 1.19 per cent of the entire basket, a sharp increase in the price of both these precious metals in 2025 has heavily influenced the headline retail inflation rate. Gold and silver inflation both hit new record highs of 68.66 per cent and 97.07 per cent, respectively, in December. According to calculations by The Indian Express, if gold and silver are excluded from the CPI, inflation in December would have stood at 0.26 per cent.

Core inflation – or inflation excluding food and fuel items – rose to 4.6 per cent in December from 4.4 per cent the previous month, again driven by gold and silver. If one were to exclude gold, silver, and certain fuel items present in the ‘miscellaneous’ category of the CPI – diesel and petrol – then this ‘super core’ inflation measure was unchanged at 2.4 per cent in December, as per calculations by The Indian Express.

“The weakness in underlying inflation pulse is persisting, warranting policy support,” noted ANZ economists Dhiraj Nim and Sanjay Mathur. “While we do not foresee any further rate cuts for now, as inflation could be above 4 per cent four quarters down, durable liquidity infusions are needed both to bring up reserve money growth and ease the prevailing upward pressure on borrowing costs. From the viewpoint of quantity theory of money, the tightness in reserve money growth could be reflecting in core prices,” they added.