With retail inflation plunging, analysts expect 25 bps rate cut in December
October 13, 2025
After delivering a cumulative 100 bps cut between February and June when it surprised with the most unconventional 50 bps cut, the RBI chose to play the status-
With retail inflation plummeting to a 99-month low of 1.54% in September, driven by a fall in food prices, many analysts are expecting the Reserve Bank-led rate-setting panel to resume the easing cycle from the next review in December, delivering a 25 bps reduction in the benchmark repo rate to 5.25%.
After delivering a cumulative 100 bps cut between February and June when it surprised with the most unconventional 50 bps cut, the RBI chose to play the status-quo card in the August and October review, citing more time to see the transmission and the impact of the tariff wars on the overall growth, even though it lowered its inflation forecast.
Retail inflation fell sharply to a 99-month low of 1.54% in September, according to provisional data released Monday. This marks the lowest on-year inflation rate since June 2017, and a drop of 53 bps from 2.07% recorded in August.
The decline was primarily driven by a sharp correction in food prices. Food and beverage inflation eased to 1.4%— the lowest in 81 months—offsetting sequential upticks in other categories. Inflation for miscellaneous items rose to 5.35%, mainly reflecting higher prices of gold and silver.
Calling for a 25 bps rate cut in the December review, Aditi Nayar, the chief economist at Icra Ratings, said the sharper than expected fall was due to a sharper than anticipated disinflation in food and beverages to 1.4% (81-month low), despite several other categories recording a sequential uptick. For instance, inflation for miscellaneous items shot up to 5.35% boosted by the surge in prices of gold and silver.
Expecting CPI to average 2.6% in FY26, dampened by the GST rate cuts as well as the continued benign food prices, she said a final 25 bps rate cut is possible in December, with its timing contingent on the degree of further transmission of the cumulative 100 bps rate cuts to the credit market as well as growth implications of GST rejig and tariffs.
“We expect downward revisions in the expected growth trajectory to drive the rate cut decision, rather than the benign CPI inflation outlook, with the latter being driven by tax policy changes and not weaker demand,” Nayar said.
Radhika Rao, senior economist at DBS Bank, also expects a 25 bps rate cut in December, saying she doesn't expect that sequential impact to derail the ongoing disinflationary trend.
“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. 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%. Growth and pipeline headwinds are likely to matter more to the RBI 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,” she said.
Rajani Sinha, the chief economist at Care Ratings, also sees a rate cut on the anvil. With the latest decline, inflation for Q2FY26 averaged 1.7%, slightly below the RBI’s projection of 1.8%. Core inflation inched up to 4.5%, mainly because of the sharp spike in precious metal prices.
“Looking ahead, food inflation is likely to stay benign supported by a favourable base and good monsoon. That said, risks remain from the late withdrawal of the monsoon and heavy rains in certain regions, which could risk crop damage," she said.
"The recent rationalisation of GST rates is further expected to have a positive impact on the overall inflationary environment. We estimate that it could lower CPI inflation by 70–90 bps annually under the current basket, assuming effective pass-through to consumers. With food inflation subdued and demand-side pressures contained, we project average inflation for FY26 at 2.4%," she added.
“From a monetary policy perspective, moderating inflation provides the RBI with greater room to focus on supporting economic growth in the midst of rising external headwinds and uncertainties surrounding the trade negotiations with the US. In case growth indicators weaken, the latest inflation figures open the door for a potential 25 bps rate cut in December,” Sinha said.
Paras Jasrai, an associate director at India Ratings, said that of the 23 major groups, 17 saw a decrease in their inflation rates in September compared to the previous month, the most significant drop since April 2024, indicating a broader benign inflationary trend across the consumption basket.
Forecasting for 1% CPI, which will be a new low in the 2011-12 series, he said the near term trajectory of inflation is expected to be weak with some pickup starting from the end of FY26. "Thus there is scope for another round of 25 bps in cuts in the repo rate in our view. However, much would depend on the incremental data which has baked in the effective GST rates as well," he said.
However, Dharmakirti Joshi, the chief economist at Crisil, said the sharper than expected fall is primarily due to a favourable base effect as core inflation accelerated 40 bps to a 25-month high of 4.6%, driven by a sharp rise in inflation in housing and gold. Housing inflation was at a 24-month high of 4%, while gold inflation stood at a decadal high of 46.9%.
He also expects CPI to modestly go up in the second half, given a low base in the food category and that the overall impact of GST rationalisation will depend on the extent of the pass-through to consumers.
After delivering a cumulative 100 bps cut between February and June when it surprised with the most unconventional 50 bps cut, the RBI chose to play the status-quo card in the August and October review, citing more time to see the transmission and the impact of the tariff wars on the overall growth, even though it lowered its inflation forecast.
Retail inflation fell sharply to a 99-month low of 1.54% in September, according to provisional data released Monday. This marks the lowest on-year inflation rate since June 2017, and a drop of 53 bps from 2.07% recorded in August.
The decline was primarily driven by a sharp correction in food prices. Food and beverage inflation eased to 1.4%— the lowest in 81 months—offsetting sequential upticks in other categories. Inflation for miscellaneous items rose to 5.35%, mainly reflecting higher prices of gold and silver.
Calling for a 25 bps rate cut in the December review, Aditi Nayar, the chief economist at Icra Ratings, said the sharper than expected fall was due to a sharper than anticipated disinflation in food and beverages to 1.4% (81-month low), despite several other categories recording a sequential uptick. For instance, inflation for miscellaneous items shot up to 5.35% boosted by the surge in prices of gold and silver.
Expecting CPI to average 2.6% in FY26, dampened by the GST rate cuts as well as the continued benign food prices, she said a final 25 bps rate cut is possible in December, with its timing contingent on the degree of further transmission of the cumulative 100 bps rate cuts to the credit market as well as growth implications of GST rejig and tariffs.
“We expect downward revisions in the expected growth trajectory to drive the rate cut decision, rather than the benign CPI inflation outlook, with the latter being driven by tax policy changes and not weaker demand,” Nayar said.
Radhika Rao, senior economist at DBS Bank, also expects a 25 bps rate cut in December, saying she doesn't expect that sequential impact to derail the ongoing disinflationary trend.
“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. 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%. Growth and pipeline headwinds are likely to matter more to the RBI 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,” she said.
Rajani Sinha, the chief economist at Care Ratings, also sees a rate cut on the anvil. With the latest decline, inflation for Q2FY26 averaged 1.7%, slightly below the RBI’s projection of 1.8%. Core inflation inched up to 4.5%, mainly because of the sharp spike in precious metal prices.
“Looking ahead, food inflation is likely to stay benign supported by a favourable base and good monsoon. That said, risks remain from the late withdrawal of the monsoon and heavy rains in certain regions, which could risk crop damage," she said.
"The recent rationalisation of GST rates is further expected to have a positive impact on the overall inflationary environment. We estimate that it could lower CPI inflation by 70–90 bps annually under the current basket, assuming effective pass-through to consumers. With food inflation subdued and demand-side pressures contained, we project average inflation for FY26 at 2.4%," she added.
“From a monetary policy perspective, moderating inflation provides the RBI with greater room to focus on supporting economic growth in the midst of rising external headwinds and uncertainties surrounding the trade negotiations with the US. In case growth indicators weaken, the latest inflation figures open the door for a potential 25 bps rate cut in December,” Sinha said.
Paras Jasrai, an associate director at India Ratings, said that of the 23 major groups, 17 saw a decrease in their inflation rates in September compared to the previous month, the most significant drop since April 2024, indicating a broader benign inflationary trend across the consumption basket.
Forecasting for 1% CPI, which will be a new low in the 2011-12 series, he said the near term trajectory of inflation is expected to be weak with some pickup starting from the end of FY26. "Thus there is scope for another round of 25 bps in cuts in the repo rate in our view. However, much would depend on the incremental data which has baked in the effective GST rates as well," he said.
However, Dharmakirti Joshi, the chief economist at Crisil, said the sharper than expected fall is primarily due to a favourable base effect as core inflation accelerated 40 bps to a 25-month high of 4.6%, driven by a sharp rise in inflation in housing and gold. Housing inflation was at a 24-month high of 4%, while gold inflation stood at a decadal high of 46.9%.
He also expects CPI to modestly go up in the second half, given a low base in the food category and that the overall impact of GST rationalisation will depend on the extent of the pass-through to consumers.