The plunge in retail inflation to an 8-yr low may open a little more space for interest rates to soften, but it may be rash to expect RBI to cut rates. The inflation measured by CPI rose to 1.5% in September, compared with 2.1% in August and 5.5% a year ago. While the numbers stand out, the drop stems from a sharp fall in food prices and a base effect. The core inflation has surged to 4.6%, a 2-yr high, thanks to housing and gold inflation. These numbers may prove sticky. Some of the data that will go into the new housing inflation index, to be released next February, may have been incorporated to avoid an abrupt adjustment next year. However, inflation may further dip, with the next number, after factoring in the impact of GST cuts, expected to come in well below 1%.

Nonetheless, RBI, which has kept the interest rate unchanged since its unexpected 50 bps reduction in June, may consider food inflation somewhat transitory, take a forward-looking approach, and attach more significance to where it thinks inflation will be in the quarters ending March and June 2026.

Despite the impact of lower food inflation on rural income, it would be erroneous to compare the inflation numbers of September and October with the persistent deflation in China, which has been hit by slow consumption, a property slump, and a price war among local companies that is driving buyers to defer purchases. Though a case for a reduction in the benchmark rate cannot be ruled out, the extent, pace and timing may be slower. It would be unwise to raise hopes simply on current numbers.