Retail Inflation Set To Touch Record Low In October, Supporting Further Monetary Easing

After falling to a 99-month low in September, retail inflation is likely to fall to a series low in October aided by the base effect, lower food prices, and GST impact.

India's retail inflation slipped to 1.54% in September, which is the lowest since June 2017. The downtick in consumer price index-based inflation, led by dwindling prices of food and core items, comes a month after inflation had edged to 2.07% in August. Economists are pegging a further fall in inflation in October.

Preliminary estimates for October CPI inflation is tracking at 0.2%, reflecting a strong favourable base effect and lower food prices, said Gaura Sengupta, chief economist at IDFC First bank. In the first two weeks of October, daily food prices indicate continued month-on-month decline in vegetable prices, as reflected by both the National Horticulture Board (NHB) and the Ministry of Consumer Affairs, she explained. The price of pulses also continued to decline in October. Encouragingly, edible oils and cereal prices, which had increased over the last two months, were also tracking lower in October, she added. The impact of GST cut will be felt more in October-November, spread over core and non-core items.

The disinflationary impulse from indirect tax relaxation on most goods categories is likely to be more material in October's print, as changes took effect in late September, Radhika Rao, senior economist at DBS bank also said.

Core inflation, which excludes the volatile food and fuel prices, rose to 4.58% in September as against 4.21% in the preceding month. This print was the highest since August 2023. Gold prices continue to exert upward pressure on core inflation. Global energy prices have also been subdued, offsetting the spillover risks from a weak rupee, while precious metals continue to stay buoyant, keeping core inflation closer to 4.5% for October, said Rao.

Monetary Policy: Space For Rate Cuts? 

Growth and pipeline headwinds are likely to matter more to the Central bank than the price outlook at this juncture, with the dovish commentary in October leaving the door open for a rate cut by the end of 2025, Rao said. A research note by ICICI Bank also said that while softer inflation is a given, it is growth which will determine the Monetary Policy Committee's rate path which, in turn, depends on external headwinds. In case growth headwinds build up, MPC would use space to spur growth.

The ultra-low headline inflation indicates that there is space for rate cuts, albeit limited, Sengupta said. Based on RBI's Q4 FY27 inflation estimate of 3.9%, forward real rate is already 1.6% (repo 5.50% minus Q4FY27 CPI inflation estimate). As per RBI's study, the neutral real rate is 1.4% to 1.9%. That said, the estimate of real rate tends to change given global and domestic growth conditions. Given the environment of heightened trade uncertainty, the estimate for neutral real rate is likely closer to 1%. The real rate analysis suggests that current monetary policy settings are not a drag on growth. Moreover, the space to ease policy rates further is limited to another 25bps to maximum 50bps cut. The terminal repo rate is seen at 5.0% to 5.25%. 

The limited space to ease rates further was the reason why RBI chose to remain on pause in October, despite seeing space to ease rates, said Sengupta. The need for a rate cut will only open up once downside risk to growth materialises, she added. The conditions under which a rate cut could materialise would be either persisting tariff pressures or consumption not responding to the GST cut. The current 50% bilateral tariff on India could drag real GDP growth by 1 ppt over a 12-month period. Impact will be felt on the labour-intensive MSME sector which accounts for about 45% of merchandise exports. The tariffs are likely to more than offset the positive impact of GST cut on growth, which is estimated at about 0.6 percentage points over a 12-month period. By the December policy, there will be some clarity on bilateral tariffs assuming the ongoing negotiations between India and US have concluded.