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Informist, Friday, Sept. 12, 2025

 

By Shubham Rana

 

NEW DELHI – Retail inflation may have risen from a month ago for the first time in 10 months in August, but the current food price trajectory, base effect, and the cut in goods and services tax rates are likely to keep price increases in check going ahead, economists said. In fact, inflation is likely to fall again in the next couple of months, providing some space to the Reserve Bank of India's Monetary Policy Committee to lower interest rates further, they said.

 

Government data released Friday showed India's CPI inflation rose to 2.07% in August from an eight-year low of 1.61% in July. This was the first time since October that inflation rose from the previous month, though it remained below the RBI's 4% target for the seventh consecutive month. The rise in inflation was primarily led by higher food prices, particularly of vegetables, which rose 3.3% on month in August.

 

With inflation in the first two months of the quarter averaging 1.8%, it is likely to be lower than the RBI's forecast of 2.1% for the September quarter. Inflation will have to rise to 2.5-2.7% in September to be in line with the central bank's projection. Economists, however, project retail inflation to fall in September.

 

"September daily price data available so far suggests CPI inflation likely slipped below the August reading, once again breaching the lower bound of the policy tolerance range of 2–6%," economists at ANZ Banking Group said in a report. "This is mainly due to favourable base effects, which will persist in October as well before turning unfavourable in November."

 

According to data from the Department of Consumer Affairs, retail prices of key vegetable were down in September so far. Tomato prices, which rose in the past few months, were down 13% on month in August. "Food prices, except for 'oils and fats', are not concerning," ANZ said.

 

Core inflation--which excludes food and fuel items--remained at 4.1% in August, the same as in July despite a rise in gold prices during the month. Economists estimate core inflation excluding gold to be way lower at around 3%.

 

Core inflation is expected to moderate in the coming months with companies expected to reduce prices after the cut in GST rates, economists said. "Looking ahead, the recent rationalisation of GST rates is expected to have a positive impact on the overall inflationary environment," CareEdge Ratings said in a report.

 

Economists expect CPI inflation to fall by around half a percentage point because of the changes made to the GST. The GST Council earlier this month overhauled the indirect tax regime by collapsing the four-slab GST structure of 5%, 12%, 18%, and 28% to a two-slab structure of 5% and 18%. It also introduced a new GST rate of 40%, to be imposed on sin and luxury goods. All new rates, except for those on tobacco products, will take effect from Sept. 22.

 

"Majority impact of GST cut will be on October and November CPI print. Indeed, the October CPI print could be lower than 1% due to large positive base effect and GST cut impact," IDFC FIRST Bank Chief Economist Gaura Sen Gupta said in a report.

 

With food price momentum slowing down and GST changes expected to lower retail prices, economists expect full-year inflation to be lower than the RBI's projection of 3.1%, which was lowered by 60 bps in August. "Full year FY26 CPI inflation is estimated at 2.4%, incorporating partial passthrough of GST cuts," Sen Gupta said.

 

The one-time impact of GST changes is likely to partly offset the impact of an adverse base effect in the coming months, keeping inflation benign, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said.

 

With inflation running below the RBI's projections and the GST rate cuts providing a downward push to prices, the Monetary Policy Committee will have space to further lower interest rates, economists said. The rate-setting panel has lowered the repo rate by 100 basis points between February and June, and left it unchanged at 5.50% in August.

 

Some economists expect the MPC to cut rates once again at its meeting ending on Oct. 1 or in December but others see the panel holding rates steady. "With August inflation print a tad higher than the 2% mark, a rate cut in October looks onerous," Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said in a report. "Even a rate cut in December looks a little difficult if growth numbers for Q1 (Apr-Jun) and Q2 (Jul-Sept) (estimates) are taken into consideration," Ghosh said.

 

GDP growth during the June quarter outperformed expectations, rising to 7.8%, against RBI's forecast of 6.5%. India's GDP growth prospects have been severely hit by the US' decision to impose 50% tariffs on Indian goods.

 

Economists project a 50-bps hit to India's GDP growth if the 50% tariff stays, although part of the impact is likely to be offset by the GST rate cuts, economists said. The possible multiple rate cuts by the US Federal Reserve in 2025 could also open up space for the domestic rate-setting panel to reduce rates, economists said. 

 

While inflation remains a positive for the Monetary Policy Committee, things are much more uncertain on the growth front, and the panel may decide to "wait and watch" in October, economists said. The crucial data for the rate-setting panel is likely to be the GDP print for the second quarter, which will be released on Nov. 28, exactly a week before the RBI announces the last monetary policy of 2025.  End

 

Edited by Avishek Dutta

 

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