India’s Retail Inflation at Record Low: How Can You Position Your Investment Strategies

India’s retail inflation in October cooled to an unprecedented low of 0.25%, the lowest CPI reading in the current series, using 2012 as the base year. This represents a significant decline from 1.54% in September and a substantial drop from the 6.21% we saw exactly a year ago (October 2024). 

For investors and anyone building wealth in India, this drop reflects price stability and opens up exciting opportunities. It also paves the way for further rate cuts in December, which are expected to boost spending and consumption.

Let’s get into it. 

What Led to this Low Inflation Rate?

Three powerful macro forces converged to drive inflation to record lows:​

The GST 2.0 Revolution

The GST Council’s major reforms, effective September 22, 2025, simplified India’s indirect tax structure from four slabs (5%, 12%, 18%, 28%) to primarily two rates (5% and 18%) and one 40% tax slab for select high-end luxury and “sin” goods. Essentials like butter, ghee, dry fruits, biscuits, cereals, and packaged water moved from 18% to just 5%. Even dairy staples like paneer and UHT milk (Ultra-high-temperature processing milk) became tax-free. This puts more money back into consumers’ pockets instantly.​

Food Deflation Accelerates

Food inflation, which accounts for nearly half the CPI basket, turned sharply negative at -5.02% in October, the steepest decline on record. Vegetable prices plummeted 27.57% year-on-year, with onions down 51%, tomatoes down 40%, and potatoes falling 31%. Pulses dropped 17%, while yellow pea imports jumped 85%. Better monsoons, improved supply chains, and strategic government interventions all played their part.​

Source: MoSPI

The Base Effect Advantage

In October 2024, inflation reached 6.21%, with food prices at 10.87%. This high base made the year-on-year comparison particularly favourable. According to the analysis, the base effect contributed 133 basis points to the inflation decline, one of the strongest in 15 months. Also, economists note that as this base effect fades, inflation may normalise a bit higher, but remain comfortably within target.

Global Commodity Softening

The global backdrop has also been benign. Commodity prices worldwide have eased, crude oil prices are off their peaks, and forecast to drop ~7% in 2025 amid an oil surplus and weak global growth. Food commodity costs have moderated due to better harvests in key producing countries. This means India is importing less inflation. Fuel and power inflation in India was just ~2% in October, which clearly indicates domestic price stability rather than causing shocks.

Why this Matters to Investors

1. Stronger Purchasing Power & Better Real Returns

With prices barely rising, household budgets stretch further, boosting discretionary spending and lifting sectors like retail, autos, entertainment, and travel.

The Reserve Bank of India (RBI) has already made 100 bps cuts in early 2025. With inflation undershooting forecasts, markets expect more easing. Lower rates mean cheaper EMIs, stronger loan demand, and better business borrowing conditions. 

2. Bullish Backdrop for Equities

Stable inflation and falling rates typically lift both valuations and earnings. Sectors that can gain from low inflation:

(i) Banks & Financials: The big winners in a low-rate, low-inflation regime. Their cost of funds drops when the RBI cuts rates, which can widen net interest margins. Loan demand also tends to surge as borrowing becomes cheaper. The Nifty Bank index has climbed around 14.6% (year-to-date) till 14 November 2025, outperforming the broader Nifty 50, which has grown 9.1% in the same period.

Source: NSE

This trend reflects investor optimism that lower inflation and rates will boost credit growth and profitability in the financial sector. 

(ii) Autos & Real Estate: Big-ticket consumer durables like cars, two-wheelers, and homes thrive when interest rates fall. Aided by GST cuts, lower loan EMIs, and improved affordability, passenger vehicle sales in India in October jumped 40.5% year-on-year to over 4.2 million units, marking a record high.

Similarly, the real estate sector is buoyed by decade-low mortgage rates; home-buying sentiment has improved as consumers lock in cheap home loans. Real estate stocks and automobile stocks could continue to perform well if the RBI delivers additional rate cuts. Essentially, lower inflation reduces the total cost of ownership for cars and homes (both through lower prices and lower financing costs), which stimulates these sectors. It’s a good time to be looking at auto and housing-related stocks or funds, as the macro winds are at their back.

(iii) FMCG: When everyday prices are flat or falling, consumers effectively have more disposable income. That bodes well for consumer discretionary sectors, from electronics and appliances to travel, leisure, and retail. Companies in fast-moving consumer goods (FMCG) and retail benefit in two ways: demand is steady (helped by better purchasing power in rural and urban areas), and margins are improving because input cost inflation has eased. 

(iv) Industrials and Manufacturing: Broader industry benefits, too. Low inflation often coincides with more stable input prices (commodities, metals, energy). Manufacturing companies can plan production with more certainty about costs. Stable fuel and transport costs (transport inflation is under 1%) help logistics and industrial firms. Moreover, if the RBI’s accommodative stance leads to improved credit availability, capital-intensive sectors like infrastructure and manufacturing could get a lift.

With Q2 FY26 earnings already strong and inflation supportive, equities sit in a favourable macro window.

Of course, diversification is key. Not every company benefits equally. For instance, exporters or IT firms might not get as direct a benefit from domestic inflation trends. But a broad takeaway is that rate-sensitive and consumer-facing sectors have a favourable outlook.

How to Play the Low Inflation Game

How should you, as a retail investor, position your portfolio in this low-inflation, high-opportunity landscape? Here are some optimistic yet practical strategies to consider:

Optimise Asset Allocation: With inflation under control, consider optimising your allocation in different asset classes, especially in sectors likely to benefit (financials, consumer, auto, etc). Strong real GDP growth of ~6.5% and falling inflation make India’s stock market attractive. Within equities, you can also consider thematic baskets or mutual funds that focus on themes such as banking, consumption, or rate sensitivities to capture these trends. A well-diversified equity exposure ensures you ride the general market sentiment while spreading risks.

Lock in High Real Yields in Fixed Income: With government bonds yielding ~6-7% and inflation near zero, long-term bonds and bond funds can be considered. You can lock in today’s yields before rate cuts potentially drive them down. 

Maintain a Cushion and Don’t Overreact to Blips: While optimism is warranted, remain practical and risk-aware. The current reading is low, but as economists suggest, we might see CPI drift back to ~2-3% next year as food prices normalise. That’s still great, but it means bond yields might not fall dramatically further, and equity markets could face other risks (like global volatility). So, don’t go all-in on one scenario. Keep a cushion: an emergency fund in liquid assets, some allocation to gold or international funds as a hedge, and avoid heavy leverage. 

Periodically Rebalance: For instance, if equity has run up to 75% of your portfolio (from a target 65%), book some profits and reallocate to debt or underweight sectors. Conversely, if inflation starts creeping up more than expected, you might rotate back a bit from rate-sensitives to inflation hedges. 

Think Long Term: Low inflation and supportive policy create a lovely backdrop for long-term investing. Use this period to build core positions in assets that will grow over the years. For example, start or continue systematic investment plans (SIPs) in equity funds, which will benefit from Rupee-cost averaging as markets potentially rise. Instead of trading in and out, stick to your asset allocation with minor tweaks to capture opportunities. 

What Could Change the Narrative?

Base Effect Wears Off: The favourable base effect that contributed 133 bps to the October decline will fade by December 2025. The RBI projects inflation to rebound to 4% in Q4 FY26 and 4.5% in Q1 FY27. This is natural as comparisons normalise.

Food Inflation Reversal: Unseasonal rainfall, climate disruptions, or supply shocks could spike food prices quickly. While current harvests are strong and reservoir levels are adequate, agriculture remains vulnerable to weather. Any spike in vegetable or cereal prices would immediately feed into overall inflation, given food’s ~48% weight in the CPI basket.​

Global Crude Oil Volatility: India imports over 80% of its crude oil requirements. A 10% increase in international crude prices can raise headline inflation by around 20 basis points. Geopolitical tensions in the Middle East, OPEC+ production cuts, or global supply disruptions could push crude prices higher, impacting transportation costs and input prices across sectors.​

Global Trade and Tariff Uncertainties: Ongoing trade tensions, tariff wars, and global fragmentation pose risks. If tariffs impact India’s export sectors (textiles, jewellery, IT services), the government might introduce fiscal stimulus that could be inflationary. Currency depreciation from capital outflows could also raise import costs.​

Monetary Policy Normalisation: While the RBI is in easing mode now, central banks globally (including the US Fed) may pause or reverse cuts if inflation resurfaces. This could tighten global liquidity, strengthen the dollar, and put pressure on emerging market currencies, including the Rupee.​

Embracing the Opportunity

India’s record-low inflation is a welcome development that has flipped many headwinds into tailwinds. Consumers have more spending power, investors get higher real returns, and businesses can thrive with lower cost pressures. 

For investors:

✅ Optimise asset allocation to capture growth rate-sensitive and consumption-driven sectors

✅ Diversify across market caps and themes 

✅ Revisit fixed deposit allocations 

✅ Rebalance periodically to maintain target allocations as markets evolve

✅ Stay aware of risks, including base effects, food price volatility, and global uncertainties

Interested in exploring opportunities in this favourable backdrop? You can also check out model portfolios on smallcase that track India’s broader growth story. From thematic ideas to sector-focused baskets, you can browse through curated collections too, such as Bullish on India, Banking, or a collection of consumption-led smallcases. Discover more here.

Disclaimer: This analysis is for educational purposes and does not constitute investment advice. Market conditions can change, and past performance is not indicative of future results. Investors should conduct their own research and/or consult a certified financial advisor before making investment decisions.