Inflation falls but not unemployment.

• In May, India’s inflation fell from 3.2% in April to 2.8%, but the unemployment rate rose from 5.1% in April to 5.8% in May.
• This decrease in inflation is beneficial for those employed as it reduces their purchasing power. However, for those seeking employment, the reduction in inflation does not make a difference.
• The decline in GDP growth from 9.2% in 2023-24 to 6.5% in 2024-25 is consistent with this decline in growth.
• The decline in growth is spread across three quarters of the economy, with agriculture alone growing faster and more rapidly.
• The decline in inflation is attributed to the relative rates of growth of the agricultural and non-agricultural sectors, which would have led to a reduction of the supply-demand gap for agricultural goods, particularly food, contributing to a lowering of the inflation rate.
• The RBI’s monetary policy, which is the means for inflation control, could not have achieved the observed configuration of events.
• There is no conclusive evidence of the role of the interest rate in controlling inflation in India.
• There is conclusive econometric evidence of the overwhelming role of the price of agricultural goods, driven by the relative rates of growth of the agricultural and non-agricultural sectors.
• Inflation targeting, which works via contraction of demand, is not a solution. If inflation is lowered by hiking the interest rate to restrain demand, other things remaining the same, inflation will rise when next the interest rate is lowered and growth revives.
• Two final observations should seal the debate on RBI’s role in lowering the inflation rate:
• The RBI’s own data on the expectation of inflation by households has remained almost unchanged from March 2024 to May 2025, and has been far higher than the RBI’s target of 4%.
• The RBI Governor expressed willingness to lower the repo rate again if inflation continues to decline, implying that India’s monetary policy merely follows inflation rather than directing its course.