Inflation at Multi-Year Lows but Core Pressures Persist: Is February the Final Rate Cut of FY26?

India’s retail inflation edged up to a three-month high of 1.33 per cent in December 2025, but the broader message remains unchanged: price pressures across the economy are unusually subdued. Headline CPI has now stayed below the RBI’s lower tolerance band of 2 per cent for four consecutive months, reinforcing the narrative that FY26 has been an exceptional year for disinflation.

Yet, beneath the calm surface, inflation dynamics are beginning to evolve. Core inflation has firmed up; service costs remain sticky and India is on the verge of a major statistical shift with the rebasing of the CPI index. Against this backdrop, the Reserve Bank of India’s February policy decision is shaping up to be less about urgency and more about timing and calibration.

FY26: A Rare Year of Comfort for the RBI

From a monetary policy standpoint, FY26 has given the RBI something it rarely enjoys room to manoeuvre. After grappling with persistent inflation pressures in previous years, the central bank entered FY26 with inflation already on a downward trajectory, helped largely by a sharp correction in food prices and favourable base effects.

Retail inflation averaged 2.2 per cent in calendar year 2025, the lowest annual reading in over a decade. This allowed the RBI to pivot decisively towards growth support. Over the course of FY26 so far, the central bank has already delivered a cumulative 100 basis points of repo rate cuts, eased financial conditions and supported domestic demand at a time when global growth signals remain mixed.

With policy rates now significantly lower than their peaks, the easing cycle has clearly entered its final phase. The February 2026 meeting is widely seen as the last realistic window for another cut in this cycle.

December Inflation: Still Low, But No Longer Falling

The December CPI print marks a subtle shift. Inflation rose from 0.7 per cent in November to 1.33 per cent, its highest level in three months. While this is still comfortably below target, it signals that the steep disinflation phase may be behind us.

Food prices continued to remain in deflation for the seventh consecutive month, although the pace of decline narrowed. Cereals slipped into deflation for the first time in over four years, while vegetables and pulses extended their prolonged correction. Oils and fruits also cooled to multi-month lows, keeping headline inflation well anchored.

However, the composition of inflation is changing. Categories such as personal care, services and precious metals showed notable firmness. Personal care inflation, in particular, surged to a record high within the series, while gold and silver prices lifted headline core inflation.

Core Inflation Sends a Mixed Signal

One of the most important developments in December was the rise in core inflation to a 28-month high of 4.8 per cent. At first glance, this appears contradictory to the low headline number. But a closer look reveals that much of this uptick was driven by precious metals rather than broad-based demand pressure.

When gold and silver are excluded, core inflation remained steady at around 2.4 per cent, suggesting that underlying demand-side inflation is still largely under control. This distinction matters for policy. While headline inflation gives the RBI room to ease, rising non-food components remind policymakers that inflation risks have not disappeared, they have merely shifted form.

A Turning Point: CPI Rebasing to 2024

December also marks the final CPI reading under the 2012 base year. From January 2026, India’s inflation data will be computed using a new 2024 base, reflecting updated consumption patterns.

The rebased CPI will assign a higher weight to non-food items, including services, housing, healthcare and discretionary spending. This change is likely to make future inflation readings more stable but also more sensitive to service-led price pressures rather than food volatility.

For the RBI, this transition complicates near-term decision-making. Policymakers will need time to understand how the new basket behaves before recalibrating their medium-term inflation outlook. This is one reason why economists are divided on whether the RBI should act in February or pause.

February Policy: Cut or Caution?

On balance, the case for one final 25 basis point cut in February remains strong. Headline inflation is far below target, growth risks persist globally and credit demand, particularly in retail and MSME segments, could benefit from marginally lower borrowing costs.

Several economists view a February cut as an “insurance move” that completes the easing cycle without committing the RBI to prolonged accommodation. Such a step would bring the repo rate to a more neutral level while preserving policy credibility.

However, the opposing argument is equally compelling. With inflation expected to firm up in the fourth quarter of FY26 as base effects fade and with the CPI and GDP series undergoing rebasing, some believe a pause would be the more prudent choice. Waiting for clarity could help the RBI avoid over-easing at a time when core pressures are becoming more visible.

What Comes After the Rate Cut Cycle

Regardless of the February outcome, the broader message is clear: FY26 is likely to mark the end of India’s current rate cut cycle. Future policy moves will depend less on food-driven inflation swings and more on structural factors such as services inflation, wage dynamics and global financial conditions.

For markets, this implies a shift in focus. The tailwind from falling rates is largely behind us. Equity and bond investors will increasingly look to earnings growth, fiscal discipline and global capital flows rather than policy easing for direction.

Conclusion

December’s inflation data reinforces India’s position as one of the few major economies enjoying both strong growth and subdued inflation. But it also signals that the easy part of disinflation is over. With CPI rebasing ahead and core pressures slowly resurfacing, the RBI’s margin for error is narrowing.

Whether February delivers one final rate cut or marks a pause, FY26 will likely be remembered as the year policy shifted decisively from fighting inflation to managing balance. The next phase will demand greater precision because from here, inflation risks are less visible, but no less important.

Disclaimer: The article is for informational purposes only and not investment advice.