Subdued Inflation Sees Brokerages Adopt Cautious Tone As Food Remains In Deflation

India’s December CPI inflation came in at 1.3% on an annual basis, below both consensus and in-house estimates, reinforcing expectations that inflation will remain well below the RBI’s 4% target in the coming months, according to brokerages UBS and HSBC.

UBS said headline inflation rose from 0.7% in November to 1.3% in December on an annual basis due to an unfavourable base effect and higher gold prices, but still undershot both its own 1.4% forecast and the 1.6% consensus. Food inflation remained in deflation on an annual basis, even as some sequential pick-up was seen in protein-rich items.

Urban inflation was higher at 2% on an annual basis, compared with 0.8% in rural areas. Core inflation increased to 4.6% on an annual basis from 4.3%, driven largely by higher gold prices, while core inflation excluding gold remained stable at 2.6%.

HSBC also said December CPI inflation at 1.3% on an annual basis was below expectations, even though sequential momentum rose 0.7% month-on-month (seasonally adjusted) due to base effects, as December CPI had been 5.2% on an annual basis in 2024. Its diffusion index shows that 75% of items in the CPI basket are below the 4% inflation mark.

UBS said CPI inflation averaged 0.8% on an annual basis in the December quarter, marginally higher than the RBI’s 0.6% estimate, and expects headline CPI inflation to average 1.9% in FY26, slightly below the RBI’s 2% forecast. The RBI has already cut the policy rate by 125 basis points, taking the repo rate to 5.25%, and UBS expects the central bank to remain in wait-and-watch mode in the February policy.

It added that the RBI will focus on monetary transmission and liquidity support, and could undertake another OMO purchase of government securities and possibly one more USD/INR buy–sell swap in the rest of FY26.

Food prices remained weak in December. UBS said food inflation was -2.7% on an annual basis, compared with -3.9% in November, while food prices fell 0.2% month-on-month, led by vegetables (-2.9%), cereals and pulses. However, eggs rose 6% month-on-month, meat and fish 1.8%, while milk and milk products, spices, and oils and fats also increased. Fuel and light inflation softened to 1.9% on an annual basis from 2.3% in the previous month. High-frequency data tracked by UBS suggests vegetable and pulses prices softened further in January, cereals remained stable, while oil and fat prices edged up.

HSBC noted that food price deflation continued for the fourth straight month on an annual basis, though sequential food prices rose 0.8% month-on-month (seasonally adjusted) after 0.5% in November, driven by vegetables and protein items.

Tomato prices rose 22% month-on-month, along with cauliflower and onion, while eggs, meat and fish picked up due to festive demand. Cereals (weight 9.7%) and pulses remained in sequential contraction, a trend seen since the start of the fiscal year.

Both houses flagged gold as a key driver of core inflation. HSBC said gold prices were up 69% on an annual basis in December, and with a 1.1% weight in the CPI basket, gold alone explains about 75 basis points of CPI inflation. HSBC’s preferred core inflation measure, excluding food, energy, housing and gold, was steady at 3.2% on an annual basis in the third quarter of 2025 and eased to 2.6% in the fourth quarter, in line with UBS’s estimate of core inflation excluding gold at 2.6%.

HSBC added that the GST rate cut-led fall in goods inflation has now normalised, with goods inflation rising 0.3% month-on-month in December, in line with the pre-GST rate-cut trend.

The December data is the last CPI print using 2012 as the base year. HSBC said the new CPI series with 2024 as the base year will be released on 12 February, and while it may not be fully comparable due to changes in the consumption basket and methodology, it does not expect it to alter the benign inflation outlook.

Both UBS and HSBC said inflation is likely to remain below the RBI’s 4% target in the coming months, supported by strong cereal production, well-stocked granaries, winter disinflation, low global oil prices and cheaper imports from China, which should keep core inflation soft for a prolonged period.