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Informist, Monday, Oct. 13, 2025

By Shubham Rana

 

NEW DELHI – A 99-month low retail inflation print in September and projection of a further decline in October to a new record low have strengthened the case for an interest rate cut by the Reserve Bank of India in December, cementing expectations after the last meeting of the RBI's Monetary Policy Committee earlier this month, economists said.

 

Data released Monday showed CPI inflation fell to 1.54% in September, the second-lowest print in the current series that has data since 2013. The only time inflation was lower than 1.54% was in June 2017, when it was 1.46%. This is set to change next month.

 

September was the eighth consecutive month when CPI inflation was below the RBI's medium-term target of 4%. This was also the second time in three months when inflation has been below the lower end of the RBI's target range of 2-6%. In these eight months, the MPC has lowered the repo rate by 100 basis points to 5.50%, with the rate last lowered in June.

 

CPI inflation is expected to fall to below 1% in October, thanks to the statistical effect of a high base, lower food prices, and the impact of the reduction in goods and services tax rates, economists said. State Bank of India expects inflation at 0.45% in October and IDFC FIRST Bank sees it even lower at 0.2%. The high base effect alone could bring down CPI inflation to 0.2% in October, if the general index of the CPI remains unchanged from September. The index had risen 1.3% sequentially in October 2024, resulting in a favourable base effect this year.

 

 

Base effect aside, the sequential price momentum is also seen under control. "In the first two weeks of October, daily food prices indicate continued month-on-month decline in vegetable prices, as reflected by both NHB (National Horticulture Board) and consumer affairs," IDFC FIRST Bank said in a report. "Encouragingly, edible oils and cereal prices which had increased over the last two months, are also tracking lower in October." According to data from the Department of Consumer Affairs, retail tomato prices were down 9% on month in October. Retail prices of onion and potato were also trending lower from September, data showed.

 

The RBI projects CPI inflation will average 1.8% in the December quarter and 2.6% in the current financial year. But inflation has consistently turned out to be lower than the central bank's projection this year. This was the case for the latest inflation print as well.

 

On Oct. 1, the RBI projected Jul-Sept CPI inflation at 1.8% with official data already available for the first two months of the quarter. Data released 13 days later showed inflation averaged 1.7% in the September quarter, 10 bps lower than the RBI's projection.

 

The central bank has also lowered the FY26 inflation forecast drastically over the last two MPC meetings. In the October meeting, it lowered the FY26 inflation forecast by 50 bps to 2.6%, on top of a 60 bps reduction in the August meeting. Even at 2.6%, the RBI's inflation forecast is higher than those of most economists, who see it 20-30 bps lower.

 

While the inflation outlook is largely benign, some hiccups remain. Core inflation--which excludes food and fuel items whose prices can be volatile--rose to a two-year high of 4.5% in September. This was largely led by higher prices of gold. Economists project core inflation excluding gold to be closer to 3%, still lower than the target of the RBI's rate-setting panel.

 

"Looking ahead, food inflation is likely to stay benign supported by a favourable base and good monsoon. That said, risks remain from the late withdrawal of the monsoon and heavy rains in certain regions, which could risk crop damage," CareEdge Ratings Chief Economist Rajani Sinha said in a note. "Additionally, persistently high double-digit inflation in edible oils warrants close monitoring, given weak sowing trends, import dependence, and elevated global edible oil prices."

 

But with inflation consistently undershooting projections and the outlook staying largely benign, calls for a repo rate cut in December will increase. The MPC has reduced the repo rate by 100 bps between February and June but has left it unchanged over the last two meetings. Most economists polled by Informist after the MPC's decision on Oct. 1 had projected the rate-setting panel would lower the repo rate by 25 bps to 5.25% in December.

 

"RBI, with its primary mandate of inflation targeting, runs the risk of missing the bull's eye if it remains fixated on market cacophony even when the deceleration in inflation has been way too evident and long-term actuals, in general, seem quite detached from the figures released by the Central Bank in its own forecasters' assessment," State Bank of India Group Chief Economic Advisor Soumya Kanti Ghosh said in a report. "It would be better to err on rate cut front than to err on the side of caution, languishing far behind the curve as markets seem to be quite uncertain about reading the Mint street's mind."

 

RBI Governor Sanjay Malhotra himself had said there is space for the MPC to support growth. "The sobering of inflation has given greater leeway for monetary policy to support growth without compromising on the primary mandate of price stability. However, the MPC decided to wait for the cumulative impact of recent policy actions to play out before charting the next course of action," Malhotra said in his statement on Oct. 1.

 

RBI Deputy Governor Poonam Gupta had said that while "some room has opened" up for more rate cuts to support domestic growth--which is expected to see downward pressure in Oct-Mar from US tariffs--the RBI will consider a host of other factors in taking the decision. "Some room has opened...but it has to be contextualised with everything else that's happening both domestically and globally," Gupta had said at the post policy press conference on Oct. 1.

 

Economists who don't expect a rate cut in December are of the view that the MPC will ease rates further only if there is a sharp slump in economic activity. "The need for a rate cut will only open-up once downside risk to growth materialises. The conditions under which a rate cut could materialise would be either persisting tariff pressures or consumption not responding to the GST cut," IDFC FIRST Bank Chief Economists Gaura Sen Gupta said in a report.  End

 

Edited by Akul Nishant Akhoury

 

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