Ending the Monetary Easing Cycle

India's Consumer Price Index (CPI)-based year-on-year inflation—commonly known as headline or retail inflation—has shown a consistent downward trend over the past nine months.

- Dr. T. K. Jayaraman

The October reading, at just 0.25%, is the lowest in a decade since the CPI series began, effectively amounting to near-zero inflation. This raises an immediate question for savers, who are planning asset purchases as well as for investors: Will the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut the repo rate during its bimonthly meeting scheduled for December 3–5?

Background

After India recovered around mid-2021 from the global Covid-19 pandemic, the economy faced a prolonged inflationary phase that lasted far longer than the pandemic itself. Retail inflation remained above the RBI’s target of 4% for nearly 30 consecutive months, from May 2021 to mid-2023.

While the Covid-19 recovery—driven by pent-up demand and the use of appropriate fiscal and monetary policies—was relatively smooth, the supply-chain disruptions caused by the pandemic had severe and lasting effects. Restrictions impeded the movement of food grains, vegetables and fruits. Given that food and energy constitute 55% of India’s consumption basket, even modest supply shocks produced disproportionately large inflationary effects.

Inflation first climbed to 6.3% in May 2021, breaching the RBI's upper tolerance band of 6%. The Russia-Ukraine war, which escalated in early 2022, further raised global commodity prices—crude oil, natural gas, wheat, and edible oils. India, being a net importer of energy, saw sharp surges in food (vegetables, cereals, pulses) and fuel inflation. Retail inflation averaged 6.7% in 2022.