- July CPI inflation rose to 4.45%, exceeding RBI's target for the second consecutive month
- Food inflation increased to 5.2%, with broad-based rises in cereals, meat, and vegetables
- Core inflation remained sticky at 3.9%, driven by rising input costs in services
India's inflation picture may look comfortable at first glance, but BofA Securities sees enough pressure underneath to keep the rate debate alive.
July headline CPI held broadly steady at 4.45% year-on-year, while core inflation remained sticky at 3.9%, leading BofA Securities' economists Rahul Bajoria and Smriti Mehra to retain their call for 50 basis points of rate hikes in FY27.
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The view comes even after the Reserve Bank of India delivered what BofA described as a "dovish hold", keeping the repo rate unchanged at 5.25% and retaining a neutral stance. BofA expects a 25-bp hike in December 2026 followed by another 25 bps in February 2027.
Food Keeps Inflation Firm
July CPI rose to 4.45% from 4.38% in June, in line with BofA's estimate and market consensus, taking inflation above the RBI's target for a second consecutive month.
The increase was led by food inflation, which rose to 5.2% in line with expectations. On a month-on-month basis, headline inflation increased 0.9%, with food prices rising 2%, while fuel prices declined.
BofA noted that the rise in food prices has become more broad-based, with cereals, meat and ready-made products showing a slight upside surprise. Vegetable prices increased 6% month-on-month.
Core Inflation Remains The Watchpoint
Core inflation remained at 3.9%, marginally above BofA's 3.8% estimate, despite rising only 0.3% month-on-month.
The brokerage said higher input costs are continuing to pass through into restaurants and accommodation, while lower gold prices are offsetting some of that pressure. Core inflation excluding precious metals increased to 2.6% year-on-year from 2.5% in June.
BofA continues to forecast FY27 CPI inflation at 4.8%, with risks "evenly balanced" but tilted towards a gradual rise in the coming months.
Monsoon, RBI Policy In Focus
Rainfall momentum improved in July after June's 40% deficit, but cumulative monsoon rainfall remained 12% below normal as of August 12. BofA said August rainfall remains critical, with July-August accounting for around 60-65% of the season's rainfall.
Meanwhile, the RBI cut its inflation projection by 10 bps to 5% and raised its GDP growth forecast to 6.7%, while lowering its core inflation projection by 40 bps to 4.3%.
With the revised inflation outlook, BofA expects the real rate to turn negative in Q3FY27 and remain so through Q1FY28, but still sees 50 bps of rate hikes in FY27.
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