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Informist, Tuesday, Aug. 12, 2025

 

By Shubham Rana

 

NEW DELHI – Retail inflation in India has likely bottomed out with an eight-year low print of 1.55% in July. The benign outlook on food prices suggests inflation may undershoot the Reserve Bank of India's forecast of 3.1% for the current financial year, offering room to the Monetary Policy Committee to lower interest rates further, though the bar for more rate cuts remains high, economists said.

 

CPI inflation in July fell for the ninth consecutive month to 1.55%, the lowest since June 2017. This is the sixth month in a row when inflation is below the RBI's medium-term target of 4.0% and only the third time in the current series that it is below the lower end of the central bank's 2-6% tolerance band. The lowest CPI inflation print in the current series, which has data from January 2014, is 1.46% in June 2017.

 

Just last week, the RBI lowered its inflation forecast for 2025-26 (Apr-Mar) by 60 bps to 3.1%, with a 130-bps reduction to the September quarter forecast to 2.1%. Economists see CPI inflation averaging even lower in FY26.

 

Barclays on Tuesday lowered its inflation forecast for FY26 to 2.7% from 3.5%. IDBI Bank has projected CPI inflation in FY26 at 2.8%, 30 bps below RBI's latest projection, while State Bank of India sees it sharply lower.

 

"Our in-house estimates point to an even lower inflation print vis--vis the RBI's projections; up to 50 points lower, which increases the onus of a rate cut by the regulator going forward although time is of the essence," SBI Group Chief Economic Adviser Soumya Kanti Ghosh said in a report.

 

While the headline inflation print in July was supported by a favourable base effect, which will be present till October, the momentum in food prices has also been relatively contained. The overall index of the CPI rose 0.9% on month in July, the highest sequential rise in nine months, but lower than the average on-month increase of 1.3% in July over the last 12 years.

 

"It is noteworthy that sequential price increase so far in the summer-monsoon season has been well-contained, relative to the spikes witnessed last year," economists at Barclays said in a report. "But amid waning favourable base effects, August CPI inflation is expected to increase modestly."

 

Economists expect CPI inflation to rise to above 2% in August because of the absence of a favourable base effect and a rise in vegetable prices. To be sure, this is not the first time economists are saying that CPI inflation has bottomed out. Some had said that inflation was unlikely to fall below the April print of 3.16%, only to be proven wrong the next month when inflation fell to 2.8%.

 

But the rise in vegetable prices is sharper right now, suggesting the best of low inflation prints is behind us. According to data from the Department of Consumer Affairs, retail tomato prices increased 22% on month in July. This is expected to push food inflation higher in August from a 78-month low of (-)1.76% last month. 

 

Even as food inflation is seen rising ahead, it is likely to remain well-contained, economists said. "Headline CPI is getting the handholding from softening food inflation supported by better supply dynamics," Dipanwita Mazumdar, an economist at Bank of Baroda, said in a report. "In the coming days as well, robust sowing, especially for rice, would further lent support."

 

Kharif sowing of food grains is up 4% on year, as per latest government data, led by a 12% rise in paddy acreage. Monsoon rains have also been normal this year even as regional distribution remains slightly skewed with east and northeast India receiving 17% less rainfall than normal.

 

Even for food items showing signs of price spikes, such as tomato, the government has begun intervening. The government has started buying tomato from wholesale markets and selling in retail markets to lower prices in Delhi.

 

Core inflation--which excludes food and fuel items, whose prices can be volatile--also moderated in July, providing further relief on the price increase front. Core inflation fell to 4.1% in July from 4.4% in June. This is the first time core inflation has declined compared to the previous month since December.

 

Core inflation has risen in recent months largely because of a rise in gold prices. According to economists, core inflation excluding gold remains even lower around 3%, suggesting benign underlying pressures.

 

"The current cycle is acting in favour of us when inflationary impact from tariff is the centre point of global discussions. We expect the downside risk to global growth will largely keep international commodity price in check," Mazumdar said in the note.

 

US tariffs are also expected to hurt India's growth with economists projecting up to a 60-bps hit to GDP growth in FY26. The RBI retained its growth forecast of 6.5% for the current year last week despite higher risks to the outlook from US tariffs, which will rise to 50% on Aug. 27.

 

Economists were already projecting FY26 GDP growth below the RBI's forecast at around 6.3%. US tariffs could push the current year's growth to below 6%. This may push the MPC to lower interest rates later this year, economists said.

 

While the MPC left the repo rate unchanged at 5.50% last week, economists and market participants expect the panel to lower the policy rate by 25 bps in October, as per an Informist poll. The rate cut in October or December will probably depend how GDP growth pans out in the first two quarters.

 

"With August inflation print likely to top 2% and be closer to 2.3%, a rate cut in October looks difficult. Even a rate cut in December looks a tad difficult if growth numbers for Q1 (Apr-Jun) and Q2 (Jul-Sept) are taken into consideration," Ghosh of State Bank of India said.  End

 

Edited by Avishek Dutta

 

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