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1. The responsibility of RBI is to keep inflation between 2% to 6%. Yet CPI inflation has been below the 2% lower bound for 3 of the last 4 months and is likely to remain below 2% for at least two more months. This means that CPI inflation will remain below the lower bound for almost 6 consecutive months from July to December.
2. CPI inflation has also been below the MPC-mandated level of 4% for 11 months of this year starting February and economists estimate that it may remain below 4% for the first 4 months of 2026 as well.
3. The decline in food inflation is even more serious. It has been in negative numbers (or deflation) for the last five consecutive months and may remain negative for the rest of 2025.
| CPI this year (%) | ||
| month | Topic | Eat |
| January | 4.26 | 5.97 |
| february | 3.61 | 3.75 |
| march | 3.34 | 2.69 |
| april | 3.16 | 1.78 |
| May | 2.82 | 0.99 |
| june | 2.1 | -1.01 |
| july | 1.61 | -1.76 |
| august | 2.07 | -0.64 |
| September | 1.44 | -2.33 |
| october | 0.25 | -5.02 |
4. Major items in the food basket such as cereals (12.35% weight), pulses (2.95% weight), milk and milk products (7.72%), oils and fats (4.21%) vegetables (7.46%) and fruits (2.88%) all remained stable or declined by 5 to 50 basis points month on month. This is a bit unusual as the month in question had Diwali.
5. The government itself promoted some deflation by cutting GST rates. SBI economist Soumyo Ghosh has calculated the impact of GST cut on CPI at 85 bps.
6. The RBI Governor had earlier said that core inflation still remains stable. Yes, core inflation has come down to 4.3% and has remained above 4% for the last 6 months, but here again, if gold prices are taken out, the core CPI for October falls to 2.6-2.7%.
In short, the seriousness and persistence of deflation cannot be doubted. The neutral real rate for India has been calculated by various RBI studies at 1.4-1.9%. This means that the real rate in India has been in the 3.5 percentage point range since June at least. Therefore it can be argued that the rate policy is restrictive to that extent.
The RBI has refrained from cutting rates in the last two policies on the argument that inflation for the 12 months ahead, i.e. April-June 2026, will be much higher than 4%. Their initial CPI estimate for the April-June quarter was 4.9%, which was cut to 4.5% in October. He is likely to have to reduce the forecast to 4% on December 5, while SBI’s Ghosh sees a 3-handle CPI for the April-June 2026 quarter.
So is a rate cut certain on December 5? Many on the street don’t think so as they have their eyes set on the all-important Q2 GDP data to be announced on November 28.
Given that WPI averaged 0.07% and CPI averaged 1.7% in July-September, the deflator for the quarter is likely to be around 1% and according to most economists, this could result in real GDP growth of more than 7%.
Some even see growth of more than 7.5%, which is a strong growth pace by historical standards. The RBI may legitimately argue that there is “room” to cut rates, but there is no need for it right now. This could lead to further rate cuts in the February policy.
On February 6, again the RBI will be faced with less than 2% CPI figures for November and December.
It won’t have GDP data for Q3, but it will have the first advance estimate of full-year FY26 growth from Mospi (or the Ministry of Statistics) and the number could come in above 7% given the lower deflator and consumption driven by income tax and GST cuts. So if it is strange for the RBI to cut rates with a growth rate of 7%, this problem may not go away in February.
Apart from the real GDP numbers, the RBI will have to decide whether it should be guided by nominal GDP with regard to the pace of growth. India had been consistently generating nominal GDP growth above 10% for more than four decades, but in FY2025, nominal GDP growth fell to 9.8%, compared to 8.8% nominal GDP in Q1 FY2,6.
The emerging consensus around second quarter nominal GDP is also around 8.5%. Now 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 combination of rising deflation in Asia and continued good harvests in India? Or is there a more fundamental slowdown in growth? RBI will have to answer these questions itself before taking a decision on rates.
Apart from these, the RBI and Indian policy makers will have to grapple with larger issues of statistical assumptions. The GDP deflator is calculated using the prices of goods, but is used to deflate an economy where services contribute more than 60% of GDP. This may lead to underestimation of the deflator and overestimation of GDP. To add to all this, the CPI and GDP indices are being revised upwards from February 2026, making it very difficult for the RBI to forecast inflation a year in advance.
The RBI will have to grapple with several statistical traps and real economy dilemmas before making up its mind on December 5. However, the positive is that the RBI is in the grip of a good dilemma – with growth above the historical trend and inflation below its mandate. The conversation would have been terrible.
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