Menu
4 min read
In October, YoY inflation in all of CPI (0.25%), food (-3.72%) and core ex-precious metals (2.5%) fell to series lows. Broader measures of inflation like the proportion of food items above 6%, and weighted median inflation, are also at series lows. We estimate Oct showed a ~20 bps impact of GST cuts, though the surge in gold and silver prices meant core inflation rose to 4.5%. Low Oct data takes the FY26 average close to the lower bound of 2% but the low base also increases risks of FY27 inflation rising to 5% even with only a mild pickup in core inflation momentum due to better growth. The MPC may need to balance the rising pressure for a Dec cut with the chance of higher inflation next year.
Series lows in inflation YoY in headline CPI, food and core ex-gold/silver
In October, YoY inflation in all of CPI (0.25%), food (-3.72%) and core ex-precious metals (2.5%) fell to series lows. Vegetable prices fell unseasonally despite floods in parts of the country, and inflation softened meaningfully in both fruits and edible oils. The proportion of food items with inflation above 6% fell to 17.5% - also a series low. Going forward, a weak base should drive a reversal despite support from a good monsoon: FY25 had strong winter disinflation taking prices below levels of the prior 2 years. Core inflation rose to 4.49%, but ex-gold (+58% YoY) and silver (+62% YoY), it was 2.5%.
Second-highest core inflation since FY23 driven mainly by gold
Apart from food, impact of GST rate cuts is visible across the core basket as well. Within core, slowdown in health (medicine and spectacles), transportation (auto), recreation (consumer electronics) and clothing largely reflected GST rate cuts in Oct. We estimate a ~20 bps impact from GST cuts on headline inflation. Higher order effects related to both transmission and offsets through the boost to demand are also likely going forward. These numbers also reflect in the weighted median inflation at the lowest on record.
FY26 projections continue to fall, but raise base risks for FY27
Lower food-driven prints take FY26 inflation projections lower still, towards the lower bound of 2%. However, seasonal behaviour of vegetable prices in 4QFY26 on the low base risks taking FY27 inflation closer to 5%, even if we assume only a mild increase in non-gold core inflation due to the boost to consumption and reviving credit growth. This makes the MPC’s job tougher: Oct data, in conjunction with MPC comments of space opening up, will raise pressure for a Dec rate cut, but forward-looking indicators point to need for caution.
To read the full report Click Here
Embrace Your Knowledge
