Retail inflation figures for October have reached their lowest levels ever. The October print came in at 0.3% due to food inflation dropping to -3.7% from -1.4% YoY in September and GST reductions in apparel, transportation, and healthcare easing core inflation outside of commodities. Although this near-zero figure appears optimistic on the surface, what does it represent for the economy, and is it just due to the rationalization of the GST rate?
Following its examination of inflation data, Crisil noted that core inflation, which does not include gold and is “a better indicator to measure demand-side price pressures and for assessing the impact of GST rationalization,” declined more sharply in October (2.6% vs. 3.0% in the previous month).
They claim that while certain categories, like FMCG, are showing gradual easing, others, like electronics and cars, have benefited from a “quicker pass-through of GST rate cuts.”
We anticipate CPI inflation to average 2.5% this fiscal due to “expectations of healthy food supplies for the rest of the fiscal, benign global crude prices and the GST rate cut benefits on mass consumption items,” they continued, citing the sharper-than-expected decline in food inflation.
They clarified that food inflation will probably return to normal in the upcoming months from its current low levels as the base effect wanes. Headline inflation may increase, but it is still expected to stay below the RBI’s tolerance range, given the probable reduction in food costs and the rising prices of gold and silver.
The crucial question is whether this implies that the RBI would lower interest rates at the upcoming policy meeting and what the growth prospects are. “On the growth front, risks are skewed to the downside,” Nuvama noted. Tariffs may have a detrimental effect on international trade and jobs, which would hurt India’s exports. Income and credit dynamics are still poor at home. In light of this, the RBI should permit currency depreciation while speeding up monetary easing.
IDFC First Bank reports that “full-year FY26 GDP growth is tracking at 6.8%, which is higher than our earlier estimate of 6.6% and in line with the RBI’s estimate.” The RBI’s aspirational aim of 7% GDP growth for India could be achieved if a trade agreement is secured with the US.
