The October CPI inflation came in at 0.25%, putting the RBI and its MPC in a spot on Dec 5, when they meet to announce their monetary policy. First, let us look at the severity of the fall in the CPI-Inflation:1. The RBI’s mandate is to keep inflation between 2% and 6%. Yet, inflation has been below the lower bound of 2% for 3 of the last 4 months and is likely to remain below 2% for at least two more months. Which means CPI inflation would be below the lower bound for almost 6 consecutive months, i.e. from July to December2. CPI inflation has also remained below the MPC’s mandated level of 4% for 11 months of this year, starting from February, and economists forecast that it may remain below 4% for the first 4 months of 2026 as well.
- Even more severe is the fall in food inflation. It has ranged in negative numbers (or deflation) for the past five consecutive months and may remain negative for the rest of 2025.
CPI THIS YEAR (%)MonthHeadlineFoodJanuray4.265.97February3.613.75March3.342.69April3.161.78May2.820.99June2.1-1.01July1.61-1.76August2.07-0.64September1.44-2.33October0.25-5.02 - Weighty items in the food basket like cereal (12.35% weight), pulses (2.95% weight), Milk and milk products (7.72%, )Oils & fats (4.21%), vegetables (7.46%) and fruits (2.88%) have all stayed flat or fallen by 5 to 50 basis points, even month on month. This is a bit unusual when the month in question had Diwali.5. The government itself infused some disinflation by cutting GST rates. SBI economist Soumyo Ghosh calculates the GST cut impact on the CPI at 85 bps.6. The RBI governor previously referred to the core inflation as still remaining sticky. Yes, core inflation has come in at 4.3% and has remained above 4% for the past 6 months, but here again, if one strips out gold prices, the core CPI for October falls to 2.6-2.7%Short point: the severity and persistence of the disinflation can’t be doubted. The neutral real rate for India has been calculated by various RBI studies at 1.4-1.9%. Which means, since June at least, the real rate in India has ranged at 3.5 percentage points. It can hence be argued that the rate policy is restrictive to that extent.The RBI, in the previous two policies, has been refraining from cutting rates on the argument that the 12-month forward inflation, i.e. for April-June 202,6 will be much higher than 4%. Their initial CPI estimate forthe April-June quarter was 4.9%, brought down in October to 4.5%. Chances are, on December 5, they will have to bring down the forecast to 4%, while the SBI’s Ghosh sees a 3-handle CPI for the April-June 2026 quarter.So is the rate cut on Dec 5 a given? Many in the street don’t think so because they have their eye on the all-important Q2 GDP data that will be announced on November 28.Given that the WPI has averaged 0.07% in July-Sept. and the CPI has averaged 1.7%, the deflator for the quarter is likely to be around 1% and this can result in a real GDP growth of over 7%, as per most economists.Some even see a growth of over 7.5%, which by historical standards is a strong growth pace. The RBI can legitimately argue that while there is “space” to cut rates, there is no need just yet. It may push the rate cut to the February policy.
On Feb 6, again the RBI will be faced with sub-2% CPI numbers for November and December.It will not have the GDP figures for the third quarter, but it will have the first advance estimate of FY26 full-year growth from MOSPI( or the ministry of statistics) and this number may also come well above 7% given the low deflator and consumption push from income tax and GST cuts. So if it is awkward for the RBI to cut rates with growth at a 7% handle, that problem may not go away in February.Besides the real GDP number, the RBI has to take a call on whether it should be guided by the nominal GDP with respect to the pace of growth. India was unfailingly generating over 10% nominal GDP growth for over four decades, but in FY25, nominal GDP growth dropped to 9.8%, while in Q1 FY26,, nominal GDP was 8.8%.The emerging consensus around Q2 nominal GDP is also around 8.5%. It remains to be seen how seriously the RBI looks at this falling pace of nominal GDP. Is this a passing phenomenon due to the disinflation raging in Asia, coinciding with consecutive good harvests in India? Or is there a more fundamental slowing of growth? The RBI needs to answer these questions for itself before it decides on the rates.Besides these, the RBI and Indian policy makers have to battle with bigger issues of statistical estimations. The GDP deflator is calculated using prices of goods, but it is used to deflate an economy where services contribute over 60% of the GDP. This can lead to underestimations of the deflator and overestimations of the GDP. To add to all this, the CPI and GDP indexes are being revised from February 2026, making it that much harder for the RBI to forecast the one-year-ahead inflation.The RBI will have to juggle through many a statistical trap and real economy dilemmas before it makes up its mind on December 5. The positive, however, is that the RBI is in the grip of a good dilemma – with growth above historical trend and inflation below its mandate. The converse would have been terrible.Read Also: Exclusive | After TCS and Cognizant, Andhra Pradesh to allot land to Accenture and Infosys for 99 paise
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