Record-low Inflation Sets Stage for December Rate Cut: I-Sec PD

India’s inflation undershoot in October and the shifting balance of risks in the economy have strengthened the case for a December rate cut, according to ICICI Securities Primary Dealership. Its report on October CPI argues that the Reserve Bank of India now has both the space and the policy rationale to ease by 25 basis points, as disinflation runs far deeper than headline numbers suggest.

Retail inflation fell to a record low of 0.25% year on year in October, helped by soft food prices and the pass-through from recent Goods and Services Tax reductions. The September print was also revised lower, indicating a sharper decline than initially estimated. While core inflation stayed close to 4.3%, the report notes that underlying pressures have weakened more significantly once the influences from auto fuels, intoxicants and the surge in precious metal prices are stripped out.

Super core inflation, which excludes these categories, cooled to 2.5% from 3.1%, with the April to September average at 3.3%.

The softness is led by goods rather than services. Consumer durable prices reflect the clearest pass-through of GST cuts, pushing core goods inflation ex fuels and precious metals towards a near record low of 2.4%. Non-durable prices remain sticky, possibly because companies have adjusted quantities rather than prices. Core services inflation held around 3%, although the report suggests that housing inflation may be underestimated.

Food inflation has also fell to record lows, driven by a deep fall in vegetable prices. Even the less volatile food excluding vegetables index rose only 1.6%. The firm’s proprietary diffusion index indicates easing at the item level across the food basket, reinforcing the breadth of disinflation.

The report estimates that inflation in the current quarter is tracking almost 100 basis points below the RBI’s forecast of 1.8%. This gap, it argues, is difficult for monetary policymakers to overlook, even with stronger growth readings and the possibility of a trade agreement with the US. GDP growth for July to September may exceed the RBI’s 7% projection, and high-frequency indicators for the following quarter remain firm. Yet the primary dealer contends that benign inflation, the absence of material upside risks, and improved foreign exchange market sentiment if a trade deal is sealed, give the Monetary Policy Committee room to cut.

ICICI Securities PD expects the central bank to deliver a 25 basis point rate cut in December with nuanced, open-ended guidance, while continuing to inject durable liquidity through a mix of secondary market bond purchases, foreign exchange swaps and open market operations.