GST Impact and Base Effect Push Retail Inflation to Historic Low

Context:

• Retail inflation, measured by the Consumer Price Index (CPI), declined to an all-time low of 0.25% in October, driven by GST rate rationalisation, a favourable base effect, and sharp food price deflation.

• The trend has intensified expectations of a future policy rate cut by the Reserve Bank of India amid easing price pressures.

Key Highlights:

Headline Inflation Trends

• Overall CPI inflation: 0.25% (YoY) — lowest ever recorded.

• Rural inflation: –0.25% (first instance of negative rural inflation).

• Urban inflation: 0.88%, reflecting relatively sticky non-food prices.

• Inflation has averaged 1.92% in the first seven months of the year.

Food Inflation Dynamics

• Food price inflation: –5.02% in October — lowest in the current CPI series.

• Major contributors to deflation:

  • Vegetables (potato, onion, tomato)

  • Pulses (especially arhar/tur)

• Food deflation has widened, exerting strong downward pressure on headline CPI due to high food weightage.

Role of GST and Base Effect

• GST rate cuts reduced indirect tax incidence on select goods, easing retail prices.

• Base effect:

  • High food inflation in October last year magnified the year-on-year decline.

• Economists note:

  • The full GST impact may be visible by November.

Non-Food Inflation

• Remains subdued overall, except:

  • Personal care and effects, partly due to a surge in gold prices (+8.7% in October).

• Indicates limited demand-side inflationary pressure beyond food.

Monetary Policy Implications

• The RBI’s Monetary Policy Committee (MPC):

  • Kept the repo rate unchanged at 5.5% on October 1.

  • Next meeting scheduled for December 3–5.

• RBI has:

  • Repeatedly revised down inflation forecasts — from 4.2% (February) to 2.6% (October).

• Possibility that full-year inflation undershoots 2.6%, strengthening the case for rate easing.

• Q2 GDP data, due by month-end, will influence MPC’s decision-making.

Key Concepts Involved:

• Inflation: Sustained rise in general price levels reducing purchasing power.

• Deflation: Fall in general price levels when inflation turns negative.

• Base Effect: Impact of last year’s price levels on current inflation readings.

• Monetary Policy Committee (MPC): RBI body responsible for setting policy interest rates.

• Goods and Services Tax (GST): Indirect tax affecting final consumer prices.

UPSC Relevance (GS-wise):

GS 3 – Economy

• Inflation trends and interpretation

• Role of GST in price transmission

• Monetary policy and interest rate decisions

Prelims Focus:

• CPI components and food weightage

• Difference between inflation moderation and deflation

• MPC’s role and repo rate decisions

Mains Enrichment:

• Analyse whether ultra-low inflation driven by food deflation and base effects warrants monetary easing.

• Discuss the limitations of headline inflation as a sole indicator of economic demand conditions.