Disinflation is going to be the big theme for India; CPI may fall to 1.3%, below RBI target: Sonal Varma, Nomura
, Managing Director and Chief Economist (India and Asia ex-Japan),
Nomura
, anticipates moderation in India's CPI, potentially falling below RBI's target. Food inflation might enter the deflation stage, with core inflation also easing. RBI's FY26 inflation projection could be overshot.
Global trade tensions impact
inflation differently, with disinflation expected in India.
US inflation data
is also keenly awaited, especially core CPI, amidst tariff pressures and labor market concerns.
What is your own outlook on today's (August 12, 2025) CPI release? What would be the factors in play and would we see an easing off from the previous month too?
Sonal Varma:
Yes, absolutely. We think it is going to be an across-the-board moderation. On headline CPI, we are expecting a moderation to 1.3% from 2.1%, going below the RBI's 2% to 6% tolerance band. We think it will be driven by a combination of both food inflation getting into a deflationary territory plus a moderation in core inflation. Core inflation had popped up to 4.5% in June, and that was partly because of the impact of gold prices, some of which has reversed. So, we are also expecting core inflation to moderate to 4% from 4.5%.
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What do you make of the upcoming projections for the inflation print because during the RBI meeting, they have stuck to that 4% mark, but they are also hopeful that going ahead, we might see an inch up. When do you think we can see a jump up?
Sonal Varma:
On average, in FY26 RBI did lower its projection to 3.1% from 3.7%. In our estimate, inflation is likely to undershoot even this revised estimate of the RBI. So, for FY26, we are projecting 2.7% on average. On the quarterly projections, we think we will continue to see further downside surprises. As for why, I think the food moderation is exaggerated because of vegetable deflation, but it is a more broad-based moderation in food prices across pulses and cereals as well and the outlook on growth looks less rosy compared to two weeks back.
If there is a negative demand shock, then underlying core inflation in our view is going to stay benign. So yes, base effects will push up CPI inflation early 2026 but I would underline its base effect, the momentum measures in inflation suggest underlying inflation is below the 4% midpoint target of the RBI.
Since everything around our lives right now is being run by trade wars and geopolitical tensions, does it have any bearing on inflation in India as well as globally in the near term?
Sonal Varma:
It definitely does have some impact. For instance, in the US, the question is whether tariffs are going to be inflationary or not and to what degree. For instance, the US core CPI reading we are getting tonight will be an important aspect to make that judgment. But on the other side of the equation, a lot of these exporters that are exporting to the US and in a number of product categories, the exporters are taking a profit margin hit.
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In India for instance, if this penalty of 25% on Russian oil stays and the announced tariff rate of 50% sticks, then the negative impact on growth will mean there is an excess supply of a number of potential categories. So, while tariffs are inflationary in the US, they are disinflationary in the rest of the world including in India partly because of this tariff impact and what it does to China's over capacity and some of that hitting other shores as well. So, it is important but for India, we think disinflation is going to be the big theme.
Let us talk about food inflation in particular. We are expecting to see a year-on-year decline and given the healthy monsoons this year, what is your outlook on vegetable prices, pulses, food grains, cereals? Where are we headed on the food inflation front?
Sonal Varma:
Right now, we are going through a trough in terms of food inflation. So, the negative readings are likely to continue for some time. It is important to bifurcate the volatile components of food such as vegetable prices where you can have extreme highs and extreme lows. Currently, we are going through the lows vis-à-vis the more durable components of food inflation, the likes of cereals, pulses, and some of the other items and the favourable monsoon season plus the carry forward stock we have on some cereal does suggest that the more durable component of food inflation should also stay benign.
So, on the whole, we are going through the lows on food inflation which is an exaggeration but the durable components are also looking favourable. So, food inflation should not be a challenge in FY26 in our view.
The markets are waiting for the India inflation print, but today, of course, all eyes will be on the US inflation print as well. What number can the markets really see on that front?
Sonal Varma:
For us the focus is primarily on the core CPI and consensus expectations are for core CPI to be up 0.3% on a month-on-month basis. We do see signs that goods inflation likely increased because of the tariff induced price pressures plus some of the more volatile components of services inflation like dropping airfares. We are also expecting some increase there and going forward, as the effective tariff rate in the US increases, there will be more evidence of goods prices moving higher in the US. In the next three-four months, we are expecting above target inflation to sustain in the US which is going to complicate the Fed's decision given the weak labour market report.
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