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India's retail inflation eases to an eight-year low of 1.55% in July
The last time the Consumer Price Index (CPI) had been this benign was in June 2017, when it recorded a 1.46 per cent uptick. Economists expect consumer demand to pick up in light of the mild inflation trend, and reckon that monetary policy actions will hinge on the trajectory and outlook for prices and economic growth.
The latest inflation print is in sync with the downward revision in inflation projections made by the Reserve Bank of India (RBI) last week, with the average price rise pace for 2025-26 (FY26) pegged now at 3.1 per cent from 3.7 per cent. While consumer prices rose an average 2.69 per cent in the first quarter of this fiscal year (Q1FY26), the RBI expects Q2 price rise to average 2.1 per cent, before rising to 3.1 per cent in Q3 and 4.4 per cent in Q4.
Headline inflation for Q1FY27 is projected at 4.9 per cent by the RBI's Monetary Policy Committee (MPC) which unanimously decided to keep the policy repo rate unchanged at 5.5 per cent while maintaining a neutral monetary stance at its review meeting that concluded on August 6.
Data released by the National Statistics Office (NSO) on Tuesday showed that food inflation, which had turned negative in June, declined by another further 1.8 per cent in July. This was largely driven by a 20.7 per cent year-on-year (y-o-y) drop in vegetable prices, the sharpest pace of decline since September 2021.
Pulses prices also fell 13.76 per cent (y-o-y), the steepest dip in over seven years. Spices and meat, which together have a 7.5 per cent weightage in the CPI, also saw prices drop 3.07 per cent and 0.61 per cent, respectively. Moreover, the pace of price rise decelerated for some items in the food basket, including cereals (3.03 per cent), eggs (2.26 per cent), milk (2.74 per cent) and sugar (3.5 per cent).
However, prices for edible oils rose a sharp 19.24 per cent, marking the ninth straight month of double digit inflation and the highest uptick since March 2022.
Fruit prices also perked up 14.42 per cent, making July the seventh consecutive month of over 10 per cent price rise for the category. Fuel inflation also accelerated slightly to 2.67 per cent.
Core inflation which excludes volatile segments such as food and energy, declined to 4.1 per cent during the month, led mainly by a moderation of inflationary pressures in transport (2s.12 per cent), recreation (2.38 per cent), clothing (2.58 per cent), housing (3.17 per cent) and education (4 per cent).
Paras Jasrai, associate director, India Ratings says that the benign inflationary trend is quite favourable especially for a sustainable improvement in consumption demand. However, the future course of monetary policy would be dependent on how the inflationary trajectory pans out in the next few months. 'We believe there is some scope for further monetary easing (maximum 50 basis points). However, this may unfold if the impact of tariff war on the Indian economy becomes too adverse,' he added.
Among 22 major states and union territories (UTs) having a population of more than 5 million for which data is available, 11 states/UTs recorded an inflation rate which was higher than the national average.
Kerala recorded the highest retail inflation of 8.89 per cent in July, while Assam (-0.61 per cent), Bihar (-0.10 per cent), Orissa (-0.30 per cent) and Telangana (-0.44 per cent) recorded deflation.
Rajani Sinha, chief economist, CareEdge Ratings says that food inflation is likely to remain contained, supported by healthy agricultural activity and a favorable base. The good progress of monsoon, adequate reservoir levels, and strong kharif sowing bode well for agricultural output and food price stability, she noted.
'While global commodity prices are broadly expected to remain stable, intermittent spikes cannot be ruled out amid ongoing geopolitical tensions. Concerns over potential US secondary sanctions on Russian crude could disrupt supply chains for major importers such as India and China. Although OPEC has spare capacity, global oil dynamics could shift and will need close monitoring,' she added.
'We expect inflationary momentum to rise in the second half of the fiscal year as the favorable base effect wanes. Accordingly, we do not anticipate further rate cuts unless economic growth weakens significantly,' said Sinha.
In its August review, the RBI's MPC had kept the FY26 GDP growth projection unchanged at 6.5 per cent, with Q1FY27 growth pegged at 6.6 per cent.
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