With retail inflation plunging, analysts expect 25 bps rate cut in December

Retail inflation slid to 1.54% in September—a 99-month low—largely on the back of softer food prices. With price pressures easing more quickly than anticipated, many analysts now expect the Reserve Bank of India’s Monetary Policy Committee to restart its easing cycle at the December review, delivering a 25 basis point cut that would take the policy repo rate to 5.25%.

Inflation hits a multi-year low

Provisional data show September’s consumer price inflation at 1.54%, the lowest year-on-year reading since June 2017 and down 53 basis points from August’s 2.07%. The moderation was sharper than expected, reinforcing the view that disinflation is broadening even as some categories show sequential firmness.

What’s driving the decline

The key driver was a pronounced cooling in food costs: food and beverage inflation eased to 1.4%, an 81-month low. This helped offset upticks elsewhere, notably in the “miscellaneous” basket, where inflation rose to 5.35%, reflecting higher prices of gold and silver. While certain services and goods have edged up month-on-month, the overarching trend points to easing price pressures.

Policy backdrop

Between February and June, the RBI delivered a cumulative 100 bps of rate cuts, including an unconventional 50 bps move. It then held rates steady in August and October to assess the transmission of earlier easing and to watch the impact of global trade and tariff dynamics on growth, even as its inflation projections were pared back.

Analysts’ expectations for December

Against this backdrop, expectations are building for a 25 bps reduction in December. Aditi Nayar of Icra Ratings attributes the sharper-than-anticipated drop in headline inflation to a deeper disinflation in food and beverages, now at an 81-month low. She expects CPI to average around 2.6% in FY26, dampened by GST rate cuts and persistently benign food prices. In her view, a final 25 bps cut in December is plausible, with timing contingent on the degree of transmission from the past 100 bps of easing and the growth implications of GST rejig and tariff changes. She also suggests the decision may be driven more by revised growth expectations than by the already-benign inflation outlook, which is being influenced by tax policy rather than weakening demand.

Radhika Rao of DBS Bank also anticipates a 25 bps move in December, noting that recent sequential increases in select categories are unlikely to derail the broader disinflation trend.

What to watch ahead of the policy review

• Transmission: How quickly earlier rate cuts pass through to lending rates and credit conditions.
• Food and commodity trends: The durability of soft food prices and movements in precious metals that affect the miscellaneous basket.
• Policy changes: The impact of GST adjustments and tariffs on growth and inflation dynamics.
• Growth outlook: Any downward revisions to activity that could strengthen the case for additional accommodation.

Bottom line: With headline inflation at a 99-month low and food prices easing, the case for a calibrated 25 bps cut in December has strengthened. The RBI’s decision will likely hinge on transmission progress and the evolving growth outlook, even as inflation remains well-contained.