Will RBI cut rates in December after record low inflation print in October?
News Summary
India's retail inflation fell sharper-than-expected to a record low of 0.25% year-on-year (y/y) in October, strengthening the case for a 25-basis-point (bp) repo rate cut by the Reserve Bank of India (RBI) in its December policy meeting, according to Barclays India. The moderation in prices was primarily driven by food deflation and the impact of recent Goods and Services Tax (GST) rate cuts. Barclays has revised down its FY26 CPI inflation forecast by 30 basis points to 2.1% y/y, which is lower than the RBI Monetary Policy Committee’s (MPC) latest projection of 2.6%. The October inflation print significantly undershot both the Bloomberg consensus of 0.4% and Barclays’ own forecast of 0.5%. Of the 119-basis-point softening in headline CPI inflation between September and October, nearly 91% was attributed to food prices, which declined 3.7% y/y.
Background
The Reserve Bank of India (RBI) is the central bank of India, tasked with formulating and implementing the nation's monetary policy. Its primary objective is to maintain price stability while supporting economic growth. The repo rate is a key instrument the RBI uses to control money supply and inflation, and CPI inflation data is a central metric in its interest rate decisions. In 2025, the global economic context, including the monetary policy stances of major economies like the United States (under President Trump's administration), has significant spillover effects on emerging markets. Domestically, India's fiscal policies, such as adjustments to the Goods and Services Tax (GST), directly influence price levels and inflation expectations. A low inflation environment typically provides central banks with greater flexibility to cut interest rates, aiming to stimulate economic growth and investment.
In-Depth AI Insights
What are the deeper underlying dynamics behind India's record-low inflation print, and how sustainable are they? - On the surface, food deflation and GST rate cuts are the primary drivers. However, food prices are highly volatile, susceptible to seasonal, weather, and supply chain disruptions, suggesting food disinflation might not be a long-term trend. - The impact of GST rate cuts, particularly across India's large unorganized sector, may have limited pass-through. Should these effects wane, inflationary pressures could re-emerge. - The core inflation (excluding gold and silver) easing from 3.1% to 2.6% suggests potentially weaker underlying domestic demand. However, the exclusion of surging global gold and silver prices (exacerbated by currency depreciation) from the 'core-core' measure might mask some underlying inflationary pressures. Beyond the immediate rate cut possibility, what long-term implications does this inflation trajectory have for India's economic policy and investment landscape? - Sustained low inflation could lead the RBI to adopt a more accommodative monetary policy stance, translating into lower borrowing costs and boosting credit growth and investment. This could be positive for credit-sensitive sectors like real estate, automotive, and infrastructure. - Long-term lower rates might encourage capital inflows into Indian equities and bonds, especially as major developed markets potentially maintain higher interest rates, increasing the relative attractiveness of Indian assets. - However, if low inflation is primarily due to structural demand weakness rather than improved supply efficiency, the economic stimulus from rate cuts might be limited, potentially leading to asset bubbles rather than sustainable growth. What are the practical obstacles and potential surprises for the RBI's December policy meeting, despite strong disinflationary data? - Despite the inflation data, the RBI may remain cautious about the sustainability of disinflation, especially given potential global commodity price volatility and the limitations of the 'core-core' inflation measure. - The upcoming Q2FY26 GDP data (due November 30) might reveal strong near-term growth, which could prompt the Monetary Policy Committee (MPC) to defer a rate cut to mitigate risks of overheating. - Global capital flows and rupee exchange rate volatility are also critical considerations for the RBI. If a rate cut leads to significant rupee depreciation, it could trigger imported inflation and capital outflow pressures, making the RBI more cautious about monetary easing.