IAS/UPSC Coaching Institute  

15 Dec 2025 : Time to pause

 Editorial 1: ​​Time to pause

Context

The Reserve Bank of India should allow time to assess how lower interest rates influence demand.

 

Introduction

Retail inflation has fallen to exceptionally low levels in late 2025, driven largely by favourable base effects and the heavy influence of food prices in the current CPI framework. While this has created room for aggressive monetary easing, these trends are temporary and must be interpreted cautiously in light of upcoming structural changes to inflation measurement.

 

Retail Inflation: Key Trends and Drivers

  • Retail inflation in November 2025 fell to 0.7%, the second-lowest ever recorded, following October 2025, which marked the lowest inflation in the series.
  • A major reason for this unusually low inflation is the high base effect. Inflation stood at 6.2% in October 2024 and 5.5% in November 2024, after which it declined steadily to 1.6% by July 2025.
  • This statistical base effect is temporary and is expected to fade gradually by July 2026, likely pushing inflation higher thereafter.

 

CPI Composition and Food Price Impact

  • The Consumer Price Index (CPI) is currently heavily skewed, with food and beverages carrying about 46% weight.
  • As a result, movements in food prices disproportionately affect overall inflation.
  • In November 2025, food prices contracted by 2.8%, pulling down headline inflation.
  • However, this decline is largely statistical, as it is measured against a high base of 8.2% food inflation in November 2024.
  • Inflation readings in the coming year are therefore likely to look very different.

 

Upcoming CPI Revision

  • The government is expected to release a new CPI series in Q1 of 2026–27.
  • The base year will be updated to 2024 from 2012, correcting a long-standing mismatch with current consumption patterns.
  • Weightages will be revised, reducing the over-dominance of food and better reflecting how Indians actually spend.
  • The new base year will also help neutralise extreme base effects, improving the quality of inflation measurement.

 

Monetary Policy Implications

  • Despite its limitations, the current CPI data guides the Reserve Bank of India’s Monetary Policy Committee (MPC).
  • In December 2025, the MPC cut policy rates by 25 basis points to 5.25%.
  • Over 2025, cumulative rate cuts total 125 basis points, the largest easing cycle since 2019.

 

Why the MPC Should Pause Further Rate Cuts

  • The MPC should pause in February 2026 to assess whether earlier rate cuts are stimulating demand and investment as they transmit through the economy.
  • Budget 2026 would have just been passed, and the MPC should allow fiscal policy effects to materialise before further monetary adjustments.
  • A pause would also give the MPC time to study the new CPI series, especially how revised weightages might alter the impact of future rate changes on inflation.

 

Conclusion

The sharp decline in inflation should not be seen as a permanent shift. As base effects fade and a new CPI series reshapes inflation dynamics, price pressures may re-emerge. Given substantial rate cuts already delivered, the RBI’s MPC should pause, assess policy transmission, and recalibrate future decisions once fiscal impacts and revised inflation metrics become clearer.