INDIA ALERT: Inflation Plummets Below 2%! Will RBI Slash Repo Rates Again?
Overview
India's Consumer Price Index (CPI) has stayed below 2% for three months, with inflation expected to remain low until H1 FY27. Economists suggest this provides room for the Reserve Bank of India's Monetary Policy Committee to consider another 25 basis points repo rate cut, potentially bringing it down from 5.25%. Experts from Union Bank of India, Kotak Mahindra Bank, State Bank of India, and CareEdge Ratings share insights on inflation trajectories and the implications for monetary policy, noting the cycle is nearing its end but a cut is not ruled out, especially if growth falters.
Inflation Falls Dramatically, Rate Cut Possibility Rises
India's economy is showing signs of cooling inflation, with the Consumer Price Index (CPI) remaining below the 2 per cent mark for the last three consecutive months. This sustained low inflation, coupled with expectations that price pressures will remain benign until the first half of fiscal year 2027, is prompting economists to suggest that the Reserve Bank of India's Monetary Policy Committee (MPC) might have room for further action.
The current subdued inflation environment has opened the door for potential policy adjustments. Economists are closely watching the central bank's stance, which has repeatedly referenced the benign inflation conditions and subdued underlying pressures, even after accounting for the impact of gold prices on inflation figures.
Financial Implications
The prospect of a lower repo rate could translate into reduced borrowing costs for businesses and consumers. The current repo rate stands at 5.25 per cent. Economists believe that a final 25 basis points rate cut in February 2026, which would bring the repo rate down to 5 per cent, cannot be entirely ruled out. However, predicting the precise timing of the last rate cut in a cycle is inherently difficult.
Retail inflation, as measured by CPI, was recorded at 0.7 per cent in November 2025, a slight increase from 0.3 per cent in the preceding month. This figure remains comfortably within the desired range.
Expert Analysis and Forecasts
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, noted that the inflation trajectory has largely aligned with expectations. She anticipates that while inflation may move upward from current levels, it is expected to remain fairly benign until H1 FY27. "With RBI having kept additional actions data dependent we see some room for 25 bps of repo rate cut," she stated, adding that the rate-cutting cycle is clearly nearing its end, followed by a prolonged pause.
Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India, forecasts inflation for FY26 at 1.8 per cent and for FY27 at 3.4 per cent. This forecast is supported by continued lower food inflation, higher kharif production, healthy rabi sowing, adequate reservoir levels, and conducive soil moisture. He remarked, "With such unprecedented level of downward revisions and further prospects of downward revision looming large, the RBI has kept the door open for future rate decisions. However, for now, repo rate at 5.25 per cent will be lower for longer."
Rajani Sinha, Chief Economist at CareEdge Ratings, indicated that headline inflation appears to have bottomed out in October but is expected to remain well below the RBI’s 4 per cent target for the remainder of the year. "The upcoming launch of the new CPI series will be an important development to watch," she commented. From a monetary policy perspective, she believes the recent increase in inflation is unlikely to concern the RBI. Although there is room for another 25-bps rate cut, CareEdge Ratings expects the MPC to hold rates steady, keeping policy space open for a future rate cut only if the growth outlook worsens.
Future Outlook
The Reserve Bank of India has maintained flexibility in its future policy decisions. The market will be keenly observing the new CPI series and the trajectory of economic growth. Should the growth outlook deteriorate, the MPC might utilize the available policy space for a rate cut. Otherwise, a prolonged pause is anticipated after the current rate-cutting cycle concludes.
Impact
This news suggests a potentially more accommodative monetary policy environment in India, which could stimulate economic activity by lowering borrowing costs. However, economists caution that the rate-cutting cycle is nearing its end. A weaker rupee could also pose an upside risk to inflation, necessitating careful monitoring by the central bank. The outlook remains data-dependent, with future actions influenced by growth dynamics.
Impact rating: 7/10
Difficult Terms Explained
CPI: Consumer Price Index, a measure used to track the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Repo Rate: The interest rate at which the Reserve Bank of India lends money to commercial banks for short periods, typically against government securities.
Basis Points (bps): A unit of measure used in finance to denote the smallest change in interest rates or other percentages. One hundred basis points are equal to one percent.
Monetary Policy Committee (MPC): A committee formed by the Reserve Bank of India to guide monetary policy and manage inflation in India.
FY (Fiscal Year): In India, this refers to the period from April 1 to March 31.
Kharif: The planting season in India that falls during the monsoon, typically from June to November.
Rabi: The winter planting season in India, typically from October to March.
Headline Inflation: The rate of inflation that includes all items in the consumer price index, including volatile items like food and energy.
