India’s headline inflation rate, as measured by the Consumer Price Index (CPI), has been below the Reserve Bank of India’s (RBI) medium-term target of 4 per cent for nine months in a row and fell to a record low of just 0.25 per cent in October. And whether this will lead to the RBI’s Monetary Policy Committee (MPC) cutting the policy repo rate further in December or February 2026 will depend a lot on how India’s interest rate-setters interpret the underlying inflation data – for there is plenty that explains how inflation has fallen so low and could have been even lower.First, there is obviously the impact of the Goods and Services Tax (GST) cuts that came into effect on September 22. Economists estimate companies are yet to pass on the full benefit of the tax cut to consumers, and this will be reflected in the inflation data for November that will be released on December 12.Then there is the base effect, which was highly favourable not just in October but has been for much of 2025. But just how favourable has the base been for CPI inflation?Story continues below this adBase impactAccording to calculations by The Indian Express, the favourable base effect in October was 133 bps – the joint second-strongest in 15 months. What this means is that headline retail inflation was 133 bps lower last month from September only because of how consumer prices moved in October 2024 – and they had moved up very sharply.Inflation is the percentage change in prices in a month compared to the same month last year. As such, the year-ago price is the denominator to calculate prices this year. If the prices last year were high, then that means the denominator is high – which exerts a downward force on the inflation rate this year. Put another way, if consumer prices had not changed at all from their September levels – they rose 0.15 per cent month-on-month – the favourable base effect would have dragged down CPI inflation even lower to 0.1 per cent.The opposite holds true when prices are either stable or declining in the year-ago period: the base effect is unfavourable and exerts upward pressure on the inflation rate. And the base effect is going to be rather unfavourable in the coming months and will peak in January 2026 before turning somewhat favourable again in mid-2026. This is why the RBI sees average CPI inflation rising to 4.5 per cent in April-June 2026 from 1.7 per cent in July-September 2025.But this is the overall base effect – and the overall effect depends heavily on the base effect of the food index, which makes up 39 per cent of the CPI. For the Consumer Food Price Index, the favourable base effect was an even larger 256 bps in October. This helped pull down retail food inflation to a record low of (-)5.02 per cent. With the food base effect turning unfavourable starting in November, food inflation should start moving up.Story continues below this adShould we exclude bullion?At present, CPI inflation is calculated by looking at price changes for 299 items; two of these items are gold and silver. Why? Because the consumption basket of households, which is what the CPI reflects, includes gold and silver. So, if gold and silver prices rise or fall sharply, they will influence the headline number.But it takes wild swings in the price of one or two items for them to exert control over the headline inflation number because any item makes up only a small portion of the CPI. Gold and silver, for instance, together make up just 1.19 per cent of the entire CPI.The problem, of course, is that gold and silver prices have risen astronomically in recent times. In fact, CPI inflation for gold and silver have both been in double digits for each of the last 20 months, over which period they have averaged 29 per cent and 25 per cent, respectively. In October, retail gold and silver prices surged 57.83 per cent and 62.36 per cent.But should monetary policy really be bothered with gold and silver inflation? What happens to the headline retail inflation rate when you exclude these two items from the CPI? Well, according to calculations by The Indian Express, CPI inflation in October would have been in negative territory: (-)0.63 per cent, to be precise.Story continues below this adWhat does all this mean for the RBI and the MPC, which is scheduled to meet on December 3-5? One, the base effect has been favourable so far, but will now turn negative, leading to a rise in inflation. Two, inflation would be even lower if not for the global rise in gold and silver prices.At the same time, the GST rate cuts have and are still reducing prices and inflation. However, price cuts may not last for too long. According to economists at QuantEco Research, price cuts have already begun to be withdrawn partially on online portals such as Amazon.“For a list of products short-listed, the median price reduction post GST cut was 16.4 per cent. Of this, nearly 6.3 per cent has been reversed, so far, pronounced for medium and low prices items,” they said in a note on Wednesday. Tellingly, they added that these partial price reversals in the online sphere “could get replicated in offline sales too, given competitive pricing”.