India's retail inflation accelerated to 2.07% in August, driven by a slight uptick in food prices. This increase marks a significant jump from the revised 1.61% recorded in July and aligns with a Reuters poll prediction of 2.1%.
Analysts view this latest inflation data as a reinforcement of a benign trend in the economy. Looking ahead, the impact of the one-time GST cut is expected to offset some adverse effects in the coming year, potentially leading to further rate cuts by the RBI.
Despite the modest uptick in food prices, overall inflation remained subdued at 2.1%, in line with expectations. Analysts suggest that this, coupled with anticipated downward pressure from GST rate cuts, indicates a possible additional rate cut of 25 basis points by the RBI in the current financial year.
Going forward, economists anticipate that inflation will remain low for the rest of 2025, supported by lower food costs and the effects of GST adjustments. The decline in inflation has been largely attributed to a year-on-year contraction of -0.69% in the food sector.
While there are expectations for an increase in food prices due to ongoing flood conditions, the impact may be mitigated by favorable base effects from the previous year. The full impact of GST recalibration is set to reflect from October, with FY26 retail inflation forecasted to average around 3.0%.
In light of the current inflation trajectory, analysts project potential rate cuts of 25 to 50 basis points by the RBI, starting from the December policy review onwards. This move is seen as a response to downward pressure on growth dynamics and a deviation from the central bank's one-year ahead inflation expectations.
