What will drive CPI lower in FY26? Rahul Bajoria explains

Economic Times

12-06-2025

Rahul Bajoria, MD, BofA, says the new CPI series is expected to moderate food inflation's influence. Core inflation might see a slight increase. Headline inflation's volatility could decrease, though average inflation may persist due to rising per capita incomes and service consumption in India. Forecasting monthly inflation fluctuations might become simpler, reducing reliance on volatile food prices.
Help us with your expectation regarding the CPI print and what do you think will drive the CPI lower for FY26?
Rahul Bajoria: We are broadly in line with where the market is expecting inflation to be around 3% on headline, with core inflation likely to outstrip it by about 4.2% as well. The core message for us from the inflation trends in the recent months has been that food inflation which was really the problem in the last three years, appears to have finally been addressed with supply augmentation being quite visible, buffer stocks being quite good and then perishable prices particularly vegetables not really going through the typical seasonal pickup that we see in the summer months.
All of this is coming together to put a dampener on inflation trends which is a very welcome news and it does kind of provide RBI a lot of leeway as far as their policy conduct is concerned and also probably helps consumer spending at the margin as we just put out this morning. We think that consumer spending will be a big beneficiary of low inflation trends which are likely to stay with us for the next three to six months as well.
What is your take on the RBI's reduction of inflation for overall FY26 because in the April meet, they had pegged this at 4%. In their last hearing, it has come down to 3.7%. What are you making of this reduction from the RBI for the overall FY26 CPI print?
Rahul Bajoria: This is broadly in line with what we are also expecting. We had reduced our inflation forecast just a month ago to 3.8%. To be honest, we are tracking it a little bit lower at this point, but you can never rule out some seasonal pickup in food prices later on, I mean, that is just the nature of the beast. But the core message that we took away was that inflation is essentially seen as quite under control in the current environment. Remember,we have not even seen any material pass through of lower energy prices into our retail fuel prices. So there is a fair amount of wiggle room that both the government and the RBI enjoys as far as inflation management for this year is concerned and so this does allow the central bank to really focus on reviving growth which seems to be the number one priority as things stand as far as policy conduct is concerned.
Along with that, we are seeing good moves on the commodity side because given the fact that just yesterday, there was a great move on crude oil prices, even gold is seen as inching higher. What levels of crude oil and gold prices are you factoring in for your CPI projections?
Rahul Bajoria: We took an average estimate of around $75 a barrel, which is a lot higher than where it is. But we need to distinguish between what is the actual price of oil and what is the pass through, that goes on, because what we have seen in the past cycles in the last few years is that the government does not necessarily pass it on as far as the benefit of lower oil or the problems of higher oil prices are concerned.
We are in a very stable price regime as far as gasoline and diesel prices are concerned with a bias for it to move lower if lower oil prices persist. As for gold, we are expecting gold prices to move up. Our in-house forecasts are for gold to be around $4,000 per ounce by the end of this year which is in line with a view also that the dollar will probably weaken. But it is a bit of a double-edged sword as far as India is concerned because Indian households tend to have very high levels of gold, but it is also something that influences inflation at the margin. While we are talking about some factors that could affect CPI projections, how much will monsoon distribution impact the supply and what is going to be the food inflation prediction from your end?
Rahul Bajoria: At this juncture, that is the biggest source of uncertainty. It always tends to be in the early parts of the monsoon cycle. What we are factoring in looking at the IMD projections is that availability of water, which probably is the most important factor and from a medium-term perspective, is not going to be a problem. We think food inflation should by and large move in line with the seasonal trends that we have seen in previous cycles when rainfall has been adequate. What we are watching out for is the impact of any excessive rainfall (since monsoon arrived a little bit early) has on the perishable price cycle because we could see supply damage, you could see a little bit of an incentive not to grow certain types of vegetables and that can have some impact on cyclical price trends. But overall, food inflation is going to be by and large under check for this particular year and some mean reversion is expected in the next year. But that is a problem only to be worried about maybe 12 months down the line.
The new CPI series is expected to be published from the first quarter of 2026. Help us understand what changes do you expect?
Rahul Bajoria: The impact of the new series is likely to dampen the impact of food inflation at the margin and core inflation is likely to become a little bit bigger. I am expecting it to probably reduce the volatility of headline inflation at the margin, but it may not necessarily lower the average inflation levels that we have seen mainly because as India's per capita incomes are growing, there is greater consumption of services, and durable goods tend to be less volatile in prices but their rate of inflation also tends to be a lot more sticky.
My sense is that it will actually dampen the volatility that we typically see in headline inflation either from a sequential or from a base effect standpoint. But it may not necessarily lower the rate of inflation. It may not have a huge impact as far as policy deliberations are concerned, but it might become a little bit easier to forecast month-to-month gyrations which right now are very subjective to food price changes which tend to have a disproportionate impact in the way inflation forecasts are done.
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