Is low inflation bad for the economy? A simple guide to India’s 99-month low inflation data, its risks, and why the RBI is under pressure to cut interest rates. Understand the economics behind the headlines.
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We often hear that rising prices (inflation) are bad for our pockets. But what if prices are rising too slowly, or even falling? India’s retail inflation just hit a 99-month low of 1.54% in September 2025. While this sounds like good news, it’s actually raising big concerns for the Reserve Bank of India (RBI) and the economy.
The Problem with Too-Low Inflation
Think of a healthy economy like a Goldilocks zone: inflation shouldn’t be too hot (too high) or too cold (too low). The RBI’s comfort zone is 2%-6%, with a perfect target of 4%.
- Sign of Weak Demand: Consistently low inflation, like we’re seeing now, is a sign that supply is much higher than demand. People simply aren’t buying enough goods and services. For example, inflation for clothing and footwear has been falling for two years, suggesting stores have more clothes than buyers.
- The China Example: China is facing a massive oversupply problem and is struggling to sell its products because its own people aren’t buying enough. They are now relying heavily on other countries to buy their goods. India, however, cannot easily follow this path as global trade tensions are making exports difficult.
What’s the Solution?
The government has tried to boost spending by cutting income tax and GST rates. But instead of splurging, people are using the extra money to save more or pay off old debts.
What’s really needed is a sustained increase in people’s real income (wages). For this to happen, the private sector (companies and industries) needs to start investing heavily in new projects and creating more jobs.
The RBI’s Two Big Tasks
- Cut Interest Rates: The most direct way the RBI can help is by cutting interest rates in its next meeting. Lower rates make loans cheaper for businesses to invest and for people to buy homes and cars. This can boost demand. With inflation so low, the RBI can afford to take this risk to stimulate the economy.
- Improve Its Forecasting: The RBI has been consistently wrong in predicting inflation. In April, it forecast 4% inflation for the year. By September, it had to drastically revise this down to 2.6%. Such a big error in just six months shows its prediction models need a serious upgrade. For a central bank, accurate forecasting is a core duty.
The Bottom Line
The current low inflation is a warning sign of weak economic demand. The RBI now has a critical role to play in reviving the economy by cutting rates and fixing its own forecasting mistakes. The goal is to get the economy back into the “Goldilocks zone” – not too hot, not too cold.