Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Context
- RBI released Monetary Policy Committee minutes highlighting concerns over sharply declining inflation.
- MPC recently reduced repo rate by 25 basis points to support economic growth.
- Despite rate cut, members flagged risks associated with very low inflation.
Current Inflation Trends
- Headline CPI inflation declined sharply to 0.3% in October 2025.
- Decline was largely driven by falling food prices.
- Inflation has breached the lower bound of the flexible inflation targeting framework.
- Inflation has remained below the 4% target for nine consecutive months.
- Average inflation for 2025–26 projected around 2%, significantly lower than earlier estimates.
Issues with Low Inflation
- Persistently low inflation indicates a possible demand deficit in the economy.
- Very low inflation can squeeze corporate profit margins, affecting business sustainability.
- It raises the real value of debt, increasing effective interest burdens on firms.
- Prolonged disinflation can delay private investment decisions, dampening growth momentum.
- MSMEs are disproportionately affected due to sticky wages and weak pricing power.
- Low inflation reduces incentives for capacity expansion, even when growth appears stable.
- Extended undershooting of inflation targets may weaken monetary policy transmission.
Way Forward
- Policy must balance growth support with maintaining inflation near target levels.
- Focus on boosting domestic demand through investment and employment generation.
- Strengthen MSME resilience via targeted credit and cost-support measures.
- Maintain policy vigilance to prevent entrenched disinflationary expectations.