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India’s Consumer Price Index (CPI)-based year-on-year infla-tion — commonly known as head-

line or retail inflation — has shown a consistent downward trend over the past nine months. The October reading, at just 0.25%, is the lowest in a decade since the CPI series began, effectively amounting to near-zero inflation. This raises an immediate question for savers, who are planning asset purchases as well as for investors: Will the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut the repo rate during its bi-monthly meeting scheduled for December 3–5?

Background

After India recovered around mid-2021 from the global Covid-19 pandemic, the economy faced a prolonged infla-tionary phase that lasted far longer than the pandemic itself. Retail inflation remained above the RBI’s target of 4% for nearly 30 consecutive months, from May 2021 to mid-2023.

While the Covid-19 recovery—driven by pent-up demand and the use of appropriate fiscal and monetary policies—was relatively smooth, the supply-chain disruptions caused by the pandemic had severe and lasting effects. Restrictions impeded the movement of food grains, vegetables and fruits. Given that food and energy constitute 55% of India’s consumption basket, even modest supply shocks produced disproportionately large inflationary effects.

Inflation first climbed to 6.3% in May 2021, breaching the RBI’s upper tolerance band of 6%. The Russia-Ukraine war, which escalated in early 2022, further raised global commodity prices—crude oil, natural gas, wheat, and edible oils. India, being a net importer of energy, saw sharp surges in food (vegetables, cereals, pulses) and fuel inflation. Retail inflation averaged 6.7% in 2022.

Even after global energy prices softened, climate-related supply shocks kept food inflation volatile. Inflation averaged 5.7% in 2023. RBI studies suggest that supply-side forces account for around 55% of India’s inflation, with the rest driven by demand factors. Core inflation—which excludes food and fuel—remained more stable.

India’s inflation target of 4%, with a ±2% tolerance band, is jointly endorsed by the government and RBI.

RBI’s Policy Response

The RBI raised the repo rate incrementally until it reached 6.5% in February 2023, marking the end of the tightening cycle. The first cut came in February 2024—a cautious 25 basis points (bps) reduction to 6.25%.

As inflation showed a clear downward trajectory, RBI introduced two more cuts: April 2024: 25 bps and June 2024: 50 bps, (which brought the bringing the repo rate to 5.50% in June this year.) 

With inflation falling to 3.15%, below the 4% target, the easing cycle strengthened.

The latest data for October—released November 12—shows inflation at 0.25%, now before the MPC for consideration at its upcoming December meeting.

A Rare Combination: Low Inflation and High Growth

Ultra-low inflation poses certain challenges. When real interest rates approach nominal rates, savings become less attractive, affecting investment. Consumers may delay purchases in expectation of further price reductions. Yet India’s growth performance has outpaced comparable emerging economies such as Brazil and Indonesia.

A recent report by global ratings agency S&P estimates that:

lGDP grew 7.8% in April–June 2024, the fastest pace in five quarters.

lGrowth is projected at 6.5% in FY 2026 and 6.7% in FY 2027, with balanced risks.

The IMF recently raised India’s FY 2025–26 growth forecast to 6.6%. The World Bank, noting the likely effects of US tariff actions, revised India’s FY26 forecast upward by 20 bps to 6.5%. On the other hand, the Ministry of Statistics and Project implementation last week reported that India’s economy grew by 8.2% during quarter (Q2) of current FY 26, as against previous quarter (Q1) 7.8%); and 8% first half ( H1) FY 2025-26, as compared to the growth rate of 6.1% in H1 of FY 25. 

Domestic growth remains resilient despite the potential impact of the proposed

penalty tariff of 25% along with the reciprocal tariffs of 25% by US on imports from and the uncertainties associated with no sign of a bilateral trade agreement in the near future. Though the rupee has depreciated considerably in recent months, the foreign exchange reserves remain comfortable at $692.6 billion. This cushion provides the RBI with room to maneuver, even as global conditions remain volatile. Lowered GST rates, along with income-tax reductions and earlier interest-rate cuts, are expected to strengthen middle-class consumption. As a result, consumption may become a larger driver of growth than investment over FY 2024–25 and FY 2025–26.

Experts have reduced India’s inflation forecast to 2.5% for FY 2025, given unexpectedly soft food prices. Food inflation is expected to normalise to around 5% by FY 2027.

Despite global uncertainties and the absence of a final trade agreement with the US, India’s external posi-tion remains relatively stable. Recent foreign exchange reserves stand at a comfortable $692.58 billion (as of November 14), though capital outflows have contributed to some rupee weakness.

One More Cut to Complete the Easing Cycle 

With the inflation battle largely won, the easing cycle that began in February 2024 is nearing completion. Economists widely expect one final 25 bps cut in early December 2025, which would bring the repo rate to 5.25%.

Using the Taylor Rule—a guideline introduced by Stanford economist John B. Taylor in 1992 that compares actual inflation and output with desired levels—Dr. Kaushik Das of Deutsche Bank recently suggested that 5.25% represents the appropriate “terminal rate” for the current cycle. which would enable the monetary policy remain neither too loose or too tight. That is the rate at which monetary policy is neither stimulating nor slowing the economy. 

Dr Soumya Kanti Ghosh of the State Bank of India Group observed:

“Missed easing cycles have a more damaging impact than easing early.”

It is therefore an opportune moment for the RBI to act decisively and end the ongoing easing cycle with the terminal rate at 5.25%.