India's Retail Inflation Plunges to Record Low 0.25%, Paving Way for RBI Repo Rate Cut and Lower EMIs

India has achieved a significant milestone with its retail inflation, measured by the Consumer Price Index (CPI), dropping to a record low of 0.25% in October. This figure is the lowest recorded since the current CPI series began in 2013 and is substantially below the Reserve Bank of India (RBI)'s mandated target range of 2-6%.

This deflationary trend, particularly in food prices which contracted by 5% in October, provides the central bank with considerable flexibility. Economists widely believe this scenario makes further repo rate cuts highly probable, with a reduction anticipated in the upcoming December policy review.

The decrease in inflation is attributed to several factors, including a strong base effect on food prices, positive impacts from a robust monsoon on crop output, healthy reservoir levels, and restrained increases in Minimum Support Prices (MSP). Additionally, recent government cuts to Goods and Services Tax (GST) rates are estimated to have contributed to the lower inflation numbers, with the full effect expected to be visible in subsequent months.

However, experts suggest that inflation may rise gradually in the coming quarters as base effects fade, but it is expected to remain within the RBI's comfort zone.

Impact

This news has a significant positive impact on the Indian economy and its citizens. Lower inflation can lead to increased purchasing power for consumers. More importantly, the prospect of further repo rate cuts by the RBI is a major driver for potential economic growth. For individuals, the most direct benefit is the likelihood of lower EMIs on home loans, car loans, and other credit facilities, leading to substantial savings over the loan tenure. This can stimulate consumer spending and investment. The US trade tariffs add an element of external vulnerability, but the RBI's potential rate cut is seen as a domestic growth impetus.

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Difficult Terms Explained:

• Repo Rate: This is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks. When the RBI cuts the repo rate, it becomes cheaper for banks to borrow money, which they are then expected to pass on to consumers in the form of lower interest rates on loans.
• Retail Inflation (Consumer Price Index - CPI): This measures the average change over time in the prices of a basket of goods and services purchased by households. It reflects the cost of living for common people. When CPI is low, it means prices are rising slowly or even falling.
• Equated Monthly Installments (EMIs): These are fixed monthly payments made by a borrower to a lender to repay a loan. EMIs typically include both principal and interest components.
• Basis Points: A basis point is 1/100th of a percentage point. For example, a 1% rate cut is equivalent to 100 basis points.
• Deflationary Zone: This refers to a period where prices are falling, rather than rising. In this context, food inflation entering the deflationary zone means food prices are decreasing.
• Monetary Easing: This is a process where a central bank reduces the supply of money and credit to stimulate economic activity, usually by lowering interest rates.
• GST (Goods and Services Tax): A consumption tax imposed on the supply of most goods and services in India. Reductions in GST rates on certain items can lead to lower prices for consumers.