India's headline inflation hit an eight-year low of 1.55% YoY in July and above our estimates of 1.3% YoY. Primarily, a favorable base effect aided the moderation, supported by a sequential softening in fuel inflation. Core CPI print eased to 4.1% YoY from 4.4% in Jun-25, breaking a six-month rising streak in July 2025. Today's multi-year low CPI print, amid the lingering shadow of tariffs, provides the RBI MPC policy space to support growth amidst global uncertainties. We continue to see FY26E CPI averaging 2.7% YoY and do not rule out a possibility of a 25bps rate cut in October 2025.
Favorable base and benign food inflation continue to support the downtrend: July 2025 CPI print eased to 1.55% YoY - the lowest since Jan 2019. Food and beverages prices declined by 0.8% YoY, the second month of a drop, led by a sharp correction in prices of vegetables, down 20.7% YoY, and pulses, down 13.8% YoY. Meanwhile, oil and fats inflation rose to 19.2% YoY and fruits inflation to 14.4% YoY in July. Sequentially however, food prices have started to rise. MoM, CPI rose by 0.93% in July, the sharpest monthly increase since October 2024, led by a seasonal spike in vegetables (especially tomato and onion) by +11.6% and fruits by 2.8%.
High frequency data for August till date suggests prices of vegetables, led by tomato (~22% MTD), and mustard oil (~4% MTD) have continued to inch up. However, prices of other food items remain benign, which is likely to keep the food inflation steady in upcoming quarters especially amid healthy arrivals of Kharif crop.
Core inflation eases, driven by sequential drop in airfares: Core CPI eased to 4.1% YoY, breaking a six-month rising streak, in line with the past six months' average of 4.1% YoY. A sequential MoM drop of 4.4% in airfares kept the transportation component soft along with a modest decline in consumer electronics and electricals. Core core CPI (excluding gold, silver and fuel) was recorded at 3.2% YoY in July versus 3.4% in six-month average. The MoM print, however, recorded a rise of +0.35% in July versus a 0.29% rise in June 2025.
India's 10% trimmed mean CPI and median CPI - excluding major items that typically depress or elevate the headline figure - stood at 3.1% YoY in July, slightly below the six-month average of 3.2% YoY, suggesting that underlying inflation remains well-anchored. Our version of The Waller Rule, applied in the Indian context, indicates that CPI's breadth is narrowing, with a mere 11% of the components running higher than 6% YoY in July 2025 versus 19% in July 2024 and 61% at peak in June 2022.
Monetary policy outlook: Normal monsoon and its relatively fair spatial distribution, robust Kharif sowing at ~4% YoY, and improved outlook for Rabi sowing due to healthy position in the reservoirs are likely keeping outlook for food inflation comfortable through FY26. Building on this, and factoring in the impact of favorable base effects, we expect FY26E inflation to average 2.7% YoY, compared with the RBI MPC's estimate of 3.1%.
Overall, for FY26E, we do not see inflation as a major risk for India. However, we remain watchful of the prevailing heightened global uncertainty and its possible spillover impact on supply chains and India's exports of labour-intensive sectors such as textiles, leather, gems and jewellery. The continued uncertainty regarding the India-US trade deal remain key risk to monitor. On the domestic front, inflation in perishables is a key factor to watch for as monsoon tiptoes at the end stage.
With benign inflation outlook and challenges to FY26E growth, we see the possibility of another 25bps rate cut in October 2025E (making it 100bps for FY26E) . We see risks to growth amplifying amid uncertain global outlook on trade and tariffs and India's elevated tariff rate amid peers on exports to the US. |
