CPI Inflation Remains Below Estimates: More Space For Rate Cuts?

A lower than estimated inflation trajectory could mean downward revisions in the Reserve Bank of India's projections and further space for rate cuts going forward.

India's retail inflation fell further in June, coming in at the lowest since January 2019. Inflation moderated to 2.1%, from 2.82% in May, according to data from the Ministry of Statistics and Program Implementation on Monday. It was also lower than economist estimates. A median forecast of economists polled by Bloomberg projected inflation at 2.3%.

With yesterday's print, average inflation stood at 2.7% in Q1, compared to the RBI's projection of 2.9%. Food CPI declined by 1.1% in June, marking the first contraction in the index since February 2019.

With food prices showing a declining trend even in July 2025, this trend is likely to continue, said Aditi Gupta, economist, Bank of Baroda. Food inflation trajectory looks benign, supported by ample rainfall, even though the spatial distribution of rainfall will require careful monitoring, she added.

Core inflation has remained sticky at about 4% mark. However, tariff driven commodity price shocks can tend to lead to some upward bias in core, Gupta said. "Overall, we believe that inflation is likely to remain below RBI's target of 4% this year. Climate-related risks and US tariff policy and its likely impact on global commodity prices remain key risk to our view," she added.

Preliminary estimate for July CPI inflation is tracking at 1.2%, reflecting moderation in food inflation and supportive basis effects, said Gaura Sengupta, chief economist at IDFC First bank. "We believe that the upcoming July 2025 CPI inflation data is set to breach the lowest ever historical print," stated a research note by Soumyakanti Ghosh, group chief economic advisor at the State Bank of India.

The outlook on inflation is also aided by a normal south-west monsoon and a softer global commodity price cycle. So far, the south-west monsoon is 15% of the Long Period Average for the season up until July 9, 2025. 597.8 lakh hectares of land has been sown in the ongoing kharif sowing season, 6.6% higher than in the corresponding period a year ago, according to data by the Department of Agriculture and Farmers' Welfare as on July 11, 2025. Sowing of important crops such as rice, cereals and pulses has progressed well, which augurs well for future supplies.

Despite uneven spatial distribution of the monsoon, high frequency food prices for now show no adverse impact, said Sengupta, who estimates full year inflation at 2.7% from an earlier estimate of 3%. This is compared to the RBI's estimate of 3.7%. In Q2FY26, the RBI's inflation estimate is 3.4% which is looking less likely with sharp moderation in food inflation pressures, she explained, adding that the RBI could revise down its FY26 CPI estimate of 3.7%. For FY27, she estimates CPI inflation at 4%.

Economists at QuantEco Research revised FY26 average CPI inflation forecast to 3.0% from 3.5% earlier. "If realised, this would be the lowest level of retail inflation since India's 1991 economic liberalisation," they said.

Monetary policy outlook

High frequency indicators continue to show moderation in urban consumption and tentative private capex, Sengupta said. The combination of subdued core inflation and extremely low current account deficit indicates that the growth remains below potential, she added. With limited space for fiscal policy to further support growth (post the income tax cut), monetary policy will have to continue to do the heavy lifting to support growth, she explained. Sengupta expects space for one more rate of 25 basis points in October or December this year.

Despite the change in stance to ‘neutral', the RBI's policy reaction to a much lower-than-forecast inflation is almost certain, said Madhavi Arora, lead economist at Emkay, who forecasts full year inflation for FY26 at 2.9%. "It is likely that the RBI will reset its FY26 CPI forecasts heavily downward in August, which could help pave the way for additional easing," she said. Further, FY26E CPI forecast of 2.9% and an unchanged repo rate (5.5%) imply a real rate of 2.6% – much higher than the estimated neutral rate of 1.65%, and possibly impinging on growth, she explained.