After falling to 1.61 per cent in July, retail inflation has inched upwards marginally in the weeks thereafter. Inflation, as measured by the consumer price index, stood at 2.07 per cent in August as per data released by the National Statistics Office. With this latest reading, inflation has averaged 1.84 per cent so far in the second quarter (July-August) of the year, lower than the central bank’s most recent projection of 2.1 per cent made in the last monetary policy committee meeting. Since February this year, inflation has remained below the RBI’s target of 4 per cent.
This moderation is largely due to falling food prices. The consumer food price index, which had touched 10.87 per cent in October last year, had declined to 3.75 per cent by February, and moved into deflation in June, July and August. Within the food category, the sharpest falls in August have been observed in vegetables and pulses. Oils and fruits though saw elevated inflation. While excess rainfall in parts of the country may cause some crop damage, it is unlikely to significantly affect output. Any shortfall in kharif will possibly be made up in rabi. This suggests that food inflation is likely to remain under control in the near term. In contrast, core inflation, which excludes the volatile food and fuel components, remains range bound. Inflation remained muted in most categories such as clothing and footwear, household goods and services and education. The exception being the personal care and effects segment, where inflation was at 16.61 per cent.
Going ahead, the recent rationalisation and lowering of GST rates, which will be in effect from September 22, will also have a calming influence. Economists at SBI estimate that the tax cuts will lead to inflation moderating in the range of 65-75 basis points over FY26-27. These effects should be visible from the October data onwards. This calls for a recalibration of inflation forecasts. In August, the RBI had forecasted inflation to average 3.1 per cent for the year. Projections by some others now indicate much lower levels — for instance, CARE Edge Ratings has pegged inflation at 2.7 per cent in 2025-26, while ICRA has forecasted 2.6 per cent. While this may create the space for more interest rate cuts, it is debatable whether the MPC will opt to loosen policy further in the near term. Growth has been strong — the Indian economy grew at a faster than expected 7.8 per cent in the first quarter. However, the effects of tariffs imposed by US President Donald Trump — though there have been some positive signals recently on the India-US trade deal — will become evident in the weeks and months ahead.
