FILE PHOTO: A man takes a picture of grocery items on his phone at a store in Bengaluru, India, September 5, 2025. REUTERS/Priyanshu Singh/File Photo

By Nikunj Ohri

NEW DELHI (Reuters) -India's retail inflation slumped to a record low of 0.25% in October, driven by a sharp fall in food prices and tax cuts on consumer goods, paving the way for a rate cut by the central bank in December.

Low inflation, declining interest rates and consumer tax cuts are seen offsetting pressure on Asia's third-largest economy after the U.S. imposed punitive tariffs on Indian exports. The economy, which grew at 7.8% in the April-June period is seen slowing over the second half of this year.

Inflation in October was below the Reserve Bank of India's 2%-6% tolerance band for a second month in a row. The central bank is mandated to ensure that inflation does not remain outside of its tolerance range for more than three consecutive quarters.

Inflation for September was also revised marginally lower to 1.44%.

A Reuters poll had projected October inflation at 0.48%.

"We see FY26 CPI below 2% paving way for a December 2025 rate cut by the RBI and see another 25-basis-point cut in February 2026," said Garima Kapoor of Elara Securities.

The decline in headline inflation and food inflation during the month is mainly due to the full impact of consumer tax cuts, the government said in a statement.

India in late September slashed goods and services tax (GST) on hundreds of mass consumption items, including dairy and personal care products, to spur domestic demand amid trade-related uncertainties due to 50% punitive tariffs by the U.S.

Food prices fell a record 5.02% year-on-year in October against a revised fall of 2.33% in September. Vegetable prices declined 27.57% after a 21.38% fall in the prior month.

GOLD PRICES KEEP CORE INFLATION ELEVATED

Core inflation, which excludes volatile items such as food and energy and is an indicator of demand in the economy, was at 4.4% in October compared with 4.5% in September, according to two economists, offsetting impact of tax cuts.

The elevated core inflation was partly because of a rally in domestic gold prices, which rose nearly 5% in October.

"The continued surge in gold price inflation, which feeds into the miscellaneous goods and services category, appears to have more than offset the impact of the GST cuts," Shivaan Tandon, Asia Economist at Capital Economics, said.

Cereal prices increased 0.92% in October, against a 2.1% rise in September, while prices of pulses dropped 16.2% after a decline of 15.3% in the previous month.

"To prevent the economy from slipping into sluggish and weak economic growth, the RBI may go for a 25-50 basis points cut in repo rate in its December 2025 monetary policy," said Devendra Pant, chief economist at India Ratings and Research.

Pant expects retail inflation for the current financial year at around 2.5%, leaving enough room for the central bank to pare rates further after a 100-basis-point cut so far in 2025.

"The current macroeconomic conditions and the outlook have opened up policy space for further supporting growth," Reserve Bank of India governor Sanjay Malhotra said at the October policy review.

The RBI's rate-setting panel will meet from December 3-5.

(Reporting by Nikunj Ohri in New Delhi, Nishit Navin in Bengaluru; Editing by Mrigank Dhaniwala and Harikrishnan Nair)