MUMBAI: With headline retail inflation tumbling to a 13-year low of 0.25% in October, economists see a higher chance of a 25 bps repo rate cut in the forthcoming monetary policy review next month. They also expect a further downward revision in the central bank’s inflation forecast for the year from the October revision of 2.6%, unless the Q2 growth surprises on the upside.
Driven by falling food prices and the GST rate cuts, headline inflation fell to just 0.25%, massively down from the September print of 1.51%.
At the same time, economists are forecasting a spike in inflation. “Going forward, inflation is projected to average 0.9% in Q3 before rising to 3.1% in Q4 FY26. With food inflation subdued, we project average inflation for FY26 at 2.1%,” Rajani Sinha, the chief economist at Careedge Ratings, said.
Aditi Nayar, the chief economist at Icra Ratings, said the monetary policy panel is likely to pare its CPI inflation projection for FY26 further from 2.6% (in the October meeting), driven by the soft sequential momentum in food prices as well as the impact of the GST rate cuts on several items in the CPI basket.
“This, along with the dovish tone in the October policy, would support a 25-bps rate cut in the December policy review, unless Q2 GDP growth surprises on the upside,” Nayar said.
Upasna Bhardwaj, the chief economist at Kotak Mahindra Bank, also sees a quarter percentage point reduction in the repo rate in the December review as she is "skeptical on the sustainability of the recent pickup in economic activity and hence sees some room for further monetary easing."
Though she sees the inflation trajectory remaining benign, she says the RBI will have to filter the festive and GST related demand from the cyclical recovery, which is unlikely to sustain for long.
According to Sinha of Careedge Ratings, "From a monetary policy perspective, moderating inflation provides the RBI with greater room to focus on supporting economic growth in the midst of continued external headwinds and uncertainties surrounding the trade negotiations with the US. If growth weakens in H2, the latest inflation readings could create scope for a rate cut.”
However, Paras Jasrai of India Ratings thinks that based on the trend of economic growth, the rationale for monetary easing is not very strong. FY26 retail inflation is now expected to be going down to around 2.5%. However, to prevent sluggish economic growth, the RBI may go in for a 25-50 bps cut in repo rate in December.
Sreejith Balasubramanian, a fund manager at Bandhan Mutual Fund, expects the RBI to go in for a 0.25% rate cut in the December meeting as he sees overall CPI inflation remaining benign in the next few months despite some rising real-time vegetable prices.
Rajeev Sharan of Brickwork Ratings sounded a different note, saying prolonged disinflation can weigh on rural incomes and demand, posing challenges for monetary policy calibration and overall growth sustainability.