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Informist, Monday, Jul. 14, 2025

 

By Shubham Rana

 

NEW DELHI – Inflation prints released Monday have renewed conversations that Reserve Bank of India's Monetary Policy Committee could consider lowering interest rates in August, a possibility most had given up on after the June meeting, where the central bank near-emptied its arsenal to support growth.

 

Economists and market participants had ruled out further interest rate cuts at least till December after the MPC on Jun. 6 lowered the repo rate by a larger-than-expected 50 basis points, and changed the policy stance to neutral from accommodative. The lower-than-expected CPI and WPI inflation prints for June have changed that narrative somewhat.

 

CPI inflation fell to 2.10% in June, the lowest since January 2019, mainly because of a statistical effect of a high base. Wholesale price inflation fell to (-)0.13% in June, the first negative print since October 2023.

 

Retail inflation has declined for eight consecutive months now, and has stayed below the RBI's medium-term target of 4.0% for five months in a row. Retail inflation averaged 2.7% in Apr-Jun, 20 basis points lower than the RBI's forecast of 2.9% for the quarter. Economists expect inflation to stay below 3% till October, supported by a favourable base effect.

 

"We are not ruling out the possibility of a final 25 bps rate cut in the August 2025 meeting, carrying forward the front-loading seen in June 2025," ICRA Chief Economist Aditi Nayar said. "Looking ahead, while food prices have witnessed a seasonal sequential uptick in July 2025 so far, the extent of the same has been relatively benign compared to that seen in the year ago month, particularly in the case of vegetables."

 

Soumya Kanti Ghosh, State Bank of India's Group Chief Economic Adviser, said retail inflation is set to breach the lowest ever historical print this month. The lowest inflation print in the current CPI series, which has inflation data since 2014, is 1.46% for June 2017.

 

The base effect in July is such that if the overall index of the CPI remains unchanged from June, retail inflation would fall to 0.6%. However, the overall index tends to rise sequentially in the summer months because of higher vegetable prices. The overall index has on average risen 1.3% month on month in July over the last 12 years. With the southwest monsoon remaining above normal so far, the sequential increase in vegetable prices is likely to remain subdued.

 

Vegetable prices are also rising, particularly for tomato. But prices of non-perishables such as pulses and cereals remain in check, providing comfort to the headline inflation print. A spike in vegetable prices notwithstanding, some economists expect CPI inflation to undershoot the RBI's full year forecast of 3.7% by nearly 50 bps.

 

"The positive inflation surprise and near-term visibility on lower inflation suggest that the RBI may miss its inflation targets for the year by 80-100 bps, with 2025-26 inflation likely to form a new reset below even 3.0% - much lower than RBI's current estimates of 3.7%, helped largely by food inflation," said Madhavi Arora, chief economist at Emkay Global Financial Services. Core inflation--which excludes food and fuel items--rose to a 21-month high of 4.4% in June from 4.3% in May largely because of an uptick in inflation of jewellery items, particularly gold. According to economists, core inflation excluding gold remains benign.

 

"In terms of the policy implications, June's softer-than-expected inflation data--the last set of inflation numbers before the RBI's next policy announcement on 6th August--certainly increases the prospects of another interest rate cut," Joe Maher, assistant economist at Capital Economics, said in a note. "That said, the fact that the RBI delivered a sizeable 50 bps cut in June and in its communications hinted that the easing cycle was now over by shifting its policy stance from 'accommodative' to 'neutral' suggests to us that the bar to a resumption in the easing cycle is high."

 

A rate cut is far from given. But the latest inflation prints and the expectation that price momentum will be contained throughout the financial year suggests the RBI could see space for further easing quicker than previously expected. In an interview to a newspaper last month, RBI Governor Sanjay Malhotra had said a lower-than-expected inflation may offer space for further monetary policy easing.

 

"Today's lower-than-expected CPI inflation outcome and likely further softening in July paves the way for potential additional easing by the RBI MPC, especially as downside risks to our 3.5% estimate emerges," economists at Barclays said in a report. "We argue that the rate cutting window will close shortly as we expect CPI inflation to rise to above 4.5% in Q4 FY25-26. It may thus become rather challenging for the RBI MPC to deliver a cut post October-December 2025."  End

 

Edited by Akul Nishant Akhoury

 

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