India's retail inflation plunged to a record low of 0.25% in October from 1.44% the previous month, thanks mainly to the statistical effect of a favourable base and a deeper deflation in the food items.

Despite high expectations, the impact of goods and services tax (GST) cuts was not clearly visible in the data due to the limited pass-through of the benefits, as well as a sharp rise in prices of gold and silver offsetting the effects, economists said. Surging gold and silver prices drove core inflation, which excludes food and fuel groups, up to 4.33% in October from 4.26%.

The latest print is broadly in line with the median estimate of 0.3% by 16 economists in a Mint poll.

This is the third time in four months that the Consumer Price Index (CPI) inflation has come in below the lower tolerance limit of the Reserve Bank of India's (RBI's) 2-6% target band. However, economists expect inflation to bottom out in October and begin to see a rise as the base effect fades.

The decline in inflation in October, like the previous several months, was led by the food group. Inflation for food items, which account for nearly 40% of the inflation basket and have a heavy influence on the headline inflation, plunged to -5.02% from -2.33% in September. The sharp decline was led by vegetables and pulses and products, inflation for which came in at -27.57% and -16.15%, respectively.

According to Aditi Nayar, chief economist at Icra, the current trend in inflation, along with a dovish tone by the Monetary Policy Committee (MPC), would support a 25-basis-point rate cut in December, unless the second quarter growth surprises on the upside. GDP growth data for the July-September quarter is scheduled to be released on 28 November.

Base effect played a crucial role in pulling food inflation as well as headline inflation down in October. Retail inflation had jumped to 6.2% in October 2024 from 5.5% the previous month, and food inflation to 10.9% from 9.2%, offering a supportive base this year.

Rising pressure

While inflation declined sharply on a year-on-year basis, the sequential momentum largely pointed towards increased price pressure in October from September. The index rose 0.15% month-on-month in October. Clothing and footwear was the only group to record a marked turnaround in sequential price build-up, suggesting some impact of GST cuts.

The month-on-month inflation for the group was -0.20% in October, recording the first such decline since the pandemic-hit month of June 2020. As a result, year-on-year inflation also dropped by 58 basis points to 1.70%. Inflation for the miscellaneous group, which is the largest group in the CPI basket after food, increased to 5.71% in October from 5.35% the previous month, led by 57.83% inflation in gold and 62.36% in silver during festivities.

"The GST impact on core inflation is still not felt fully as the pass-through is incomplete. The impact on core inflation should be more visible by November," said Madan Sabnavis, chief economist at Bank of Baroda. Nayar noted that the impact of GST rationalization got dulled by the spike in gold and silver prices during the festive season.

The current print is sharply lower than the RBI's inflation projection of 1.8% for the October-December quarter. This means that unless inflation rises sharply in the next two months, it may end the third quarter undershooting the central bank's forecast again.

Despite the current low inflation trajectory, RBI's projections, given in early October, see inflation shooting up sharply to 4.0% in January-March quarter and then further to 4.5% in April-June quarter of 2026-27.

Economists also anticipate an increase in inflation to 3.5-4% from January onwards, which is lower than what the RBI had projected in the last meeting. There is also a wide expectation of the RBI paring its inflation forecast further after the record low print in October.