India inflation cools more than expected in October, boosting hopes for further rate cuts

India's consumer inflation significantly cooled to 0.25% in October, falling below expectations and strengthening prospects for future Reserve Bank of India (RBI) policy easing. Despite this, the RBI maintained its key policy rate at 5%, citing ongoing transmission of previous cuts and a revised lower inflation forecast for FY2026, while acknowledging potential growth deceleration due to global trade uncertainties and the impact of recent U.S. tariffs on key Indian export sectors. Analysts suggest there is no immediate urgency for a rate cut, anticipating inflation to rebound towards 4% in FY2026.

Analysis

India's consumer inflation significantly cooled to 0.25% in October, falling below the 0.48% estimate and September's 1.54%, primarily driven by GST reductions and lower food/fuel prices. This disinflationary trend strengthens expectations for future Reserve Bank of India (RBI) policy easing, yet the RBI maintained its key policy rate at 5% in October, citing ongoing transmission of previous cuts and a revised FY2026 inflation forecast of 2.6%.

The central bank, however, signaled potential growth deceleration in H2 FY2026 amid global trade uncertainties, compounded by new U.S. tariffs on Indian imports. These tariffs, impacting labor-intensive sectors like textiles and jewelry, could lead to job losses despite exports to the U.S. accounting for only 2% of GDP. Domestic measures, like September's GST cuts, aimed to spur demand but have yielded mixed results across sectors.

Analysts, including Standard Chartered's Anubhuti Sahay, foresee no immediate urgency for a December rate cut, noting current growth and ongoing transmission of prior cuts. Sahay projects inflation to rebound to approximately 4% for FY2026, suggesting the RBI may preserve its monetary policy flexibility. This indicates a cautious approach, balancing disinflationary pressures with potential growth headwinds.

Key Decisions for Investors

• Monitor RBI's December monetary policy meeting for any shifts in stance, particularly regarding future rate cuts given the mixed economic signals.
• Evaluate the impact of U.S. tariffs on Indian export-oriented sectors, especially those with high labor intensity, for potential ripple effects on broader economic growth and corporate earnings.
• Assess the sustainability of domestic demand post-festive season, considering the mixed performance of sectors following recent GST reductions, as this will influence corporate revenue outlooks.