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Informist, Wednesday, May 14, 2025

NEW DELHI – Retail inflation in India has moderated substantially over the last few months and hit a 69-month low of 3.16% in April. The pace of disinflation and the benign outlook have pushed economists to lower their CPI inflation forecast for the current financial year to well below the Reserve Bank of India's projection of 4.0%.

"We are currently forecasting CPI inflation to moderate further to 3.5% average in FY26, from 4.6% in FY25. This is a downward revision from our earlier forecast of 3.8%," Kaushik Das, chief economist - India at Deutsche Bank, said in a note. "If food price shocks do not materialise, CPI inflation could average even lower," Das said.

CPI inflation has been declining for six months in a row now and stayed below the RBI's target of 4% for three consecutive months. CPI inflation fell to 3.16% in April, the lowest since July 2019, because of a decline in food prices. Core inflation--which excludes food and fuel items, whose prices can be volatile--remained at 4.1% for the second consecutive month in April.

Food inflation fell to a 42-month low of 1.78% in April, pulled down by vegetable inflation, which was at a 26-month low of (-)10.98% last month. While prices of some vegetable have risen in May because of higher temperatures, the overall food price outlook remains benign, economists said.

"The inflation trajectory continues to provide comfort amid robust crop arrivals, timely monsoons, low crude oil prices, and low non-energy commodity prices," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said in a report. Kotak Mahindra Bank lowered its FY26 CPI inflation estimate to 3.5% from 4% earlier.

According to Nomura, headline inflation is tracking around 2.8% in May, with food inflation trackers showing a contraction in the prices of pulses, cereals and edible oils. "Beyond May, we believe disinflation is likely to persist, even as seasonality dictates that vegetable prices will rise in the coming months," Nomura said in a report. Nomura projects FY26 CPI inflation at 3.9%.

This benign inflation outlook can open up space for the RBI's Monetary Policy Committee to lower interest rates more than previously expected, economists said.

"With inflation firmly below the RBI's 4.0% target in the immediate future, we believe there is ample space for the RBI to focus on addressing growth concerns. Hence, we expect a terminal repo rate of 5.00%, which implies an additional 100 bp (basis points) in rate cuts by end-2025," Nomura said.

Kotak Mahindra Bank's Bhardwaj also expects the MPC to reduce the repo rate by another 75-100 bps by the end of FY26. The MPC has already lowered the repo rate twice in 2025, with two 25 bps cuts in February and April, bringing down the key interest rate to 6.00%.  End

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

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