The October retail inflation numbers have slipped to historic lows. With food inflation contracting to -3.7% in October from -1.4% YoY in September and GST cuts in clothing, transport, and medical care helping ease core inflation excluding commodities led to the October print coming in at 0.3%. While optically, this near-0 number does look encouraging, what does it mean for the economy and is it just because of the GST rate rationalisation?
GST impact on inflation?
Well, IDFC First Bank highlighted that the “GST cut reduced headline CPI inflation by 0.25 percentage points, reflecting partial pass-through. In November, we expect the remainder of the transmission to occur.”
They highlighted that the impact of GST cuts is visible in segments such as clothing and footwear, healthcare, recreation, vehicles, and household goods. “Even before the GST cut, core-core inflation has remained near historical lows for nearly two years, indicating the presence of a negative output gap.”
Faster pass-through impact of GST in select sectors
Crisil, after its analysis of the inflation numbers, highlighted that core inflation excluding gold – “a better indicator to measure demand-side price pressures and for assessing the impact of GST rationalisation – dropped at a sharper pace in October (2.6% vs 3.0% in the previous month).”
According to them, some categories, like electronics and automobiles have benefitted from a “quicker pass-through of GST rate cuts, while some, like FMCG, are exhibiting gradual easing.”
Given the sharper-than-expected fall in food inflation, “expectations of healthy food supplies for the rest of the fiscal, benign global crude prices and the GST rate cut benefits on mass consumption items, we expect CPI inflation to average 2.5% this fiscal,” they added.
Benign inflation outlook through FY26
Though the overall inflation outlook for FY26 remains benign and well within the RBI’s comfort zone, Nuvama Institutional Equities highlighted that in the coming months, “CPI may rise as vegetable prices normalise and gold/silver prices increase.”
They explained that as the base effect fades, food inflation is likely to normalise in coming months from currently depressed levels. Given the likely moderation in food prices along with rising gold and silver prices, headline inflation may pick up but is still anticipated to remain within the RBI’s tolerance band.
Growth outlook still skewed
The big question then is, does it mean the RBI will cut rates in the next Policy meet and what’s the outlook for growth? Nuvama pointed out that “on the growth front, risks are skewed to the downside. Externally, tariffs could weigh on global activity, creating negative spillovers for India’s exports and employment. Domestically, income and credit dynamics remain weak. Against this backdrop, the RBI should accelerate monetary easing while allowing rupee depreciation.”
According to IDFC First Bank, “Full-year FY26 GDP growth is tracking at 6.8%, which is higher than our earlier estimate of 6.6% and in line with the RBI’s estimate. If a trade deal is reached with the US, full-year GDP growth could reach 7%, which is the RBI’s aspirational target for India.”
Gaura Sengupta, chief economist, IDFC FIRST Bank outlined that she believes that “a rate cut will only become likely if downside risks to growth materialize. Conditions under which this could occur include either persistent tariff pressures or a failure of the consumption recovery to sustain beyond the festive season.”
For now it’s a wait and watch. All eyes are now on the RBI Policy meeting next month.