Retail inflation plunges to record low, opening door for RBI rate cut

India’s retail inflation rate plunged to a record low of 0.25% in October, the steepest fall since the current Consumer Price Index (CPI) series began in 2012, driven by tumbling food prices and the base effect of last year’s surge, strengthening the case for another rate cut by the Reserve Bank of India (RBI) in December.

Data released by the Ministry of Statistics on Wednesday showed inflation well below the 0.4% median estimate in a Bloomberg survey of economists and far below the central bank’s 4% target.

The drop was attributed to a sharp fall in food costs, especially vegetables, cereals, and edible oils, helped by surplus rainfall and improved supplies, as well as the impact of a September overhaul of consumption taxes that reduced prices of key household goods.

The easing gives RBI, which has already lowered its benchmark repurchase rate by one percentage point since February, new room to support growth at a time when the global economy remains unsettled.

RBI governor Sanjay Malhotra and his six-member Monetary Policy Committee paused in October after a series of cuts that took the policy rate to 5.5%.

Economists now see at least one more 25-basis-point reduction in December, a move that could mark the end of the current easing cycle if inflation rebounds as expected early next year. One basis point is one-hundredth of a percentage point.

Analysts said the latest reading underscores how much food prices, accounting for nearly half of India’s consumer basket, continue to dominate the inflation trajectory.

A high base from October 2024, when vegetables and pulses spiked after erratic rains, exaggerated the annual comparison. That effect, combined with a government push to release grain stocks and the unwinding of last year’s supply bottlenecks, pulled headline inflation close to zero.

Yet the moderation may be short-lived. The RBI’s own projection shows inflation returning to around 4% in the January–March quarter as the favorable base fades.

Core inflation, which excludes food and fuel, has held steady near 4.3%, suggesting that underlying price pressures persist.

Economists at Goldman Sachs and Barclays said the October data gives the RBI room for a symbolic cut but warned that policymakers would avoid over-reacting to one unusually soft print.

The central bank’s dilemma lies in balancing price stability with the need to sustain momentum in an economy growing close to 8% annually.

India’s services exports and construction have buoyed GDP, while domestic consumption is showing early signs of fatigue.

A small rate reduction in December could reassure markets that policy remains growth-friendly without fuelling demand excessively.

Bond yields fell modestly after the release, with the benchmark 10-year yield slipping four basis points to 6.83%.

The rupee strengthened slightly against the dollar as traders speculated that subdued inflation might bring a shallower easing path and preserve the real yield advantage over peers.

The government welcomed the data, with finance minister Nirmala Sitharaman saying the figures reflected “effective supply-side management and resilient farm output.”

Officials credited a combination of improved logistics, buffer stock releases, and state-level cuts in transport levies for easing pressure on household budgets.

Still, economists cautioned against reading the headline number as evidence of a structural change. A sustained decline would depend on stable monsoons and continued moderation in global food and energy prices.

Any fresh weather shock, rise in oil, or disruption in supply chains could quickly reverse the gains. With the US and Europe expected to maintain higher interest rates well into 2026, imported inflation risks remain.

The central bank has repeatedly said it aims to secure durable disinflation before relaxing further. The likely scenario, analysts said, is a calibrated 25 bps cut in December followed by a prolonged pause through much of next year, allowing the full impact of previous easing to filter through.

India’s latest numbers place it among the few major economies where inflation has dropped below target, contrasting with stickier price pressures elsewhere in Asia.

While that strengthens New Delhi’s narrative of stability, the coming months will test whether this low reading is a one-off statistical trough or the start of a new phase of price discipline.