Food costs have dropped sharply, India's inflation in October fell to a record low, and expectations for interest rate cuts have risen again.

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Driven by a sharp decline in food prices, India’s inflation rate fell to a historic low in October, strengthening market expectations that the Reserve Bank of India will accelerate the pace of rate cuts.

On November 12, data released by India’s Ministry of Statistics showed that the Consumer Price Index (CPI) in October rose by 0.25% year-on-year, lower than the market forecast of 0.4%, marking the lowest record since current statistics began in 2012.

Specifically, the decline in food prices further widened, falling 5.02% year-on-year, the largest drop on record. This decline was mainly influenced by three factors: first, a high base of food prices in the same period last year; second, abundant rainfall during the monsoon improved supply conditions; and third, tax reforms implemented in September lowered the cost of household necessities.

The mild inflation data has significantly strengthened market expectations for monetary policy easing by the Reserve Bank of India. The market expects the central bank to cut rates by 25 basis points in December, and expectations for another cut in February next year are also rising. Since February, the RBI has cut the benchmark repo rate by 100 basis points, but paused the easing in October.

Rising expectations of rate cuts have driven the Indian stock market to rise for the third consecutive day. The yield on 10-year government bonds closed down 2 basis points at 6.46% on Wednesday.

Expectations of Central Bank Rate Cuts Rise

In October, the Reserve Bank of India lowered its inflation forecast for fiscal year 2026 from 3.1% to 2.6%. However, the actual inflation data of 0.25% in October suggests economic conditions may be even weaker than the bank’s latest forecasts, and far below the 4% policy target. Although the central bank expects inflation to rebound to 4% next quarter, the huge gap in current data has led the market toward a strong consensus for rate cuts.

Emkay Global economist Madhavi Arora said:

"Given that inflation data has repeatedly fallen below the Reserve Bank of India’s forecasts, we believe that policymakers’ continued overreliance on one-year inflation outlooks is becoming increasingly outdated in a rapidly changing environment."

Market expectations for rate cuts have taken a clear path. Garima Kapoor of Elara Securities believes that the inflation rate for this fiscal year is likely to fall below 2%, creating conditions for a rate cut in December, and predicts the central bank will further cut rates by 25 basis points at its meeting in February next year.

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