lipped from: https://www.thehindu.com/opinion/editorial/time-to-pause-on-retail-inflation-data-takeaways/article70395261.ece
The Reserve Bank of India should wait to see the impact of lower interest rates on demand
Retail inflation in November 2025 came in at its second-lowest level, of 0.7%, ever recorded in this series of data, following up on October, which saw the lowest-ever rate of inflation. There are a few different takeaways from this data. The first is that the statistical base effects resulting in such abnormally low inflation levels will soon wane. For example, inflation in October and November 2024 was 6.2% and 5.5%, respectively. Since then, however, it slid steadily every month to reach 1.6% in July 2025. This, in essence, means that the statistical high base effect keeping inflation down will wear off between now and July 2026. The other factor to keep in mind is how skewed the current Consumer Price Index (CPI) is. The food and beverages category accounts for nearly 46% of the weightage in the index, which means that whatever happens to that category has an inordinately high impact on the overall inflation rate. For example, food prices contracted 2.8% in November 2025, dragging down the entire index. However, this contraction in food prices was statistical, since it was on a high base of 8.2% in November last year. The next year is likely to see a radically different inflation number. The government is expected to release the new series of the CPI in the first quarter of 2026-27. This new series will update the base year to 2024 from the earlier highly outdated 2012. The weightages will also be rejigged to better represent the consumption behaviour of Indians, which means food will not play such an overwhelming role in determining the inflation rate. Finally, the new base year will also mean statistical base effects will be addressed.
That said, the current inflation data is what the Reserve Bank of India’s Monetary Policy Committee (MPC) has to go on. In its December 2025 meeting, the MPC decided to cut interest rates by 25 basis points to 5.25%. The MPC will meet again in February 2026. Despite its prediction that economic growth is going to slow in the second half of the year, the MPC should nevertheless pause its rate cuts in February. Over 2025, it has cut rates by 125 basis points, the most significant such cuts since 2019. It should now wait to see whether these lower rates do spur demand and investment as they percolate through the system. The second reason in favour of a pause is that Budget 2026 would have just been passed, and so the MPC should allow the impact of fiscal policy be felt before further tweaking India’s monetary policy. Finally, the MPC should take time to study the new CPI series, when it comes, to see how rate cuts might impact the new index and its redistributed weights.
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