Goodbye Inflation, See You in Next Cycle

The Reserve Bank’s December policy decision was not about stimulus or stance, nor was it a response to a sudden weakening of growth. It was an acknowledgement that the COVID-era inflation cycle has finally ended. The central bank cut the repo rate by 25 basis points because the price dynamic that shaped policymaking for a few years has run its course. The story now is not about where inflation is going, but about how completely it has vanished from the centre of the macro conversation.

The current cycle began with the post-pandemic reopening, global supply-chain dislocation and domestic food shocks that pushed inflation well above target through 2022 and 2023. It then moved through a long plateau in which inflation drifted lower but not convincingly enough for policymakers to loosen their guard. That phase defined much of 2024.

The endgame arrived in 2025, and it was abrupt.

Headline inflation in October fell to a record low of 0.3%, far below the lower tolerance band, while in the July to September quarter it averaged 1.7%, for the first time in the flexible inflation targeting era that inflation undershot the lower bound for an entire quarter. What makes this moment decisive is not just the level, but the breadth of the disinflation. Nearly four-fifths of the CPI basket is now below 4%, signalling a regime that has shifted fundamentally rather than eased temporarily.

The drivers of this shift are also clear. Food prices, which were once the chief source of volatility, have swung into sustained deflation across vegetables, cereals and spices, a reversal the Governor emphasised as historically unusual for the season.

Core inflation has softened meaningfully. Once the lift from precious metals is stripped out, the core measure is down to 2.6%. The supply side narrative that once justified caution has turned into a foundation for stability. Kharif production is higher, and rabi sowing is ahead of last year, reservoir levels are above average and global food and energy prices remain benign. These are not fleeting supports. They represent the structural easing that marks the end of an inflation cycle, not the midpoint of one.

This is why the MPC could unanimously cut without hesitation. The policy space was not created by softening forecasts but by the exhaustion of the inflationary phase itself.

Growth remains strong, with the economy expanding by 8.2% in the July to September quarter, supported by consumption, investment and services activity. Yet there are early signs of moderation in manufacturing sentiment, electricity demand and some high-frequency indicators. In an environment where inflation is no longer a constraint and growth is maturing rather than accelerating, cushioning the economy through a modest easing is both reasonable and timely.

The real risk factors now lie elsewhere.

The Governor flagged an external landscape that remains unsettled by geopolitical shifts and divergent monetary paths across advanced economies. Merchandise exports have softened, while some domestic indicators show early signs of fatigue. Yet none of these risks point to a resurgence of inflation. 

They are the risks of a post-inflation cycle world, characterised by unevenness rather than overheating. The decision to inject durable liquidity through open market purchases and a dollar buy-sell swap fits neatly into this context. It supports transmission in an economy that no longer needs inflation-fighting vigilance but does need stable financial conditions as the cycle transitions.

The December policy, therefore, acts as a marker. It draws a line under a cycle that began with price shocks and ends with a broad-based retreat in inflation across the basket. The RBI has not declared victory. It has simply recognised reality. The inflation cycle has turned. The next one will arrive in its own time.

For now, goodbye inflation. See you in the next cycle. 

Also Read: RBI Cuts Rates, Reading Softness Beneath the 8.2% Shine