Experts said this boosted chances of an interest rate cut at the December monetary policy meeting, although this also depends on factors such as economic growth and the conclusion of a trade deal with the US. This marks the third time in FY26 that inflation has stayed below the central bank’s target range of 4% with a margin of two percentage points on either side of that figure. Inflation based on the Consumer Price Index (CPI) was 1.4% in September and 6.2% in October 2024. The declining trend is likely to continue in the coming months, according to experts.
For the Reserve Bank of India (RBI), which targets 4 percent inflation with a tolerance band of two percentage points on either side, such an exceptionally low print alters the boundaries of its near-term policy choices. While the headline number appears supportive of monetary easing, the broader economic context complicates the picture, revealing a situation in which the central bank must weigh disinflationary comfort against the imperatives of growth management and external vulnerabilities.
Food for thought
A large part of the October deceleration can be traced to the extraordinary cooling of vegetable and pulses prices. Onion, potato and tomato prices crashed in double digits, contributing disproportionately to the drop in the CPI. Even within this broad softness, certain categories bucked the trend. Oils and fats recorded the highest inflation within the food basket, and core inflation remained relatively firmer at 4.4 percent. Precious metals, specifically gold, surged dramatically, partly offsetting the disinflationary impact of the GST cuts on core items.
The magnitude of the food-price correction has also amplified the base effect, further pulling down the year-on-year comparison. Experts suggest that given expectations of stable food supplies, favourable global crude oil dynamics and the full impact of the rationalised GST structure, the soft inflation trajectory may extend over the next several months. Crisil’s projection of 2.5 percent inflation for FY26 reinforces the sense that India is temporarily operating in a very low-inflation environment not seen in over a decade.
Scope for long-term gains
The September GST rationalisation has proven pivotal in shaping the latest inflation print. By collapsing multiple slabs and bringing mass-consumption items into lower tax brackets, the reform directly reduced prices while also simplifying compliance for businesses. Industry leaders point to these changes as evidence that prudent tax policy can reinforce macroeconomic stability.
Moreover, the GST overhaul interacts with broader investment priorities. This period of low inflation can be converted into long-term productivity gains by accelerating infrastructure development, logistics improvements and agricultural supply-chain modernisation. If these supply-side reforms strengthen output capacity, they could help India maintain price stability even as the economy expands.
Risks of prolonged deflation
A rate cut, if it materialises, would ripple through the economy in multiple ways. Lower policy rates would make retail loans cheaper, easing the cost of buying homes, vehicles and consumer durables. Consumption, which already benefited from the removal of the 12 percent and 28 percent GST slabs, would likely receive another boost. Lower borrowing costs also tend to stimulate investment, supporting corporate balance sheets at a time when lower inflation is helping improve margins.
But the benefits of cheaper credit are not evenly distributed. Urban consumption is typically more responsive to rate changes than rural spending. If disinflation deepens and persists, rural incomes could come under strain, particularly for farmers whose earnings are closely tied to crop prices. A prolonged deflationary stretch in food items may eventually depress farm revenues, generating a negative feedback loop for rural demand. Thus, the very forces that ease inflation and strengthen consumption in cities could simultaneously weaken the spending ability of large sections of the rural economy.
A changing policy space for RBI
In theory, inflation far below the target should create immediate space for a rate cut. In practice, the RBI faces a nuanced dilemma. The Monetary Policy Committee’s upcoming December meeting will be at a moment of strong domestic economic momentum, driven by government capital expenditure, GST rationalisation and resilient private consumption. With second-quarter GDP growth estimated at over 7 percent, the central bank must determine whether easing policy risks overstimulating an already healthy economy or whether the inflation decline indicates scope to cut borrowing costs further.
Comments by RBI Governor Sanjay Malhotra in October hinted at a newfound policy space to support growth, but policymakers must also track forthcoming data such as the November and December inflation prints and growth numbers. The risk that the recent disinflation could prove uneven, especially if food prices rebound from unusually depressed levels, may call for cautious calibration rather than immediate action. As some analysts note, robust growth itself could persuade the RBI to postpone a rate cut until early 2026.
The inflation picture cannot be viewed in isolation from the external environment. India continues to face headwinds from global uncertainty and, more specifically, the 50 percent tariff imposed by the United States on a wide range of Indian goods. The tariff disproportionately hurts MSMEs and labour-intensive sectors, threatening employment and exports at a time when global demand is uneven. The RBI’s recent trade relief measures underscore the severity of the pressure and the need for supportive domestic policies. The outcome of ongoing trade negotiations with the US may influence monetary policy as well. A positive resolution could ease pressure on export-oriented industries, while a protracted standoff may prolong stress.
A fine balance ahead
The current confluence of data puts the RBI in an unusual strategic position. The record-low inflation print is too significant to disregard, and many economists argue that it provides clear justification for easing policy sooner rather than later. However, the simultaneous strength of domestic growth complicates any argument for an immediate, mechanically determined rate cut based solely on inflation deviations.
A recent report by SBI Research highlighted that maintaining a balance between supporting growth and controlling inflation will test the central bank’s tactical flexibility. Upcoming data, including November and December inflation prints, Q3 GDP, and new CPI and GDP series, will further influence policy decisions, the report added.
The real test for the RBI lies in managing this duality. If growth loses momentum in the second half of the fiscal year, the October inflation print could prove decisive in prompting a rate cut. But if the economy continues its robust trajectory, the central bank may opt for patience, waiting for more consistent signals. The balance between these competing forces will shape not just the December policy, but the broader monetary direction through 2026.
Thus, India’s unusual combination of very low inflation and strong economic expansion presents both opportunity and risk. The months ahead will reveal whether India is entering a phase of sustained low inflation or experiencing a transient dip driven largely by food-price corrections.