As consumer price inflation (CPI) eased to 2.1 percent for the month of June, touching 78-month lows on the back of falling food prices. However, as retail inflation continues to moderate, led by degrowing vegetable prices, according to experts, the Reserve Bank of India will proceed cautiously amid strong downside risks to its inflation and growth estimates for FY2026.
With the CPI cooling, the headline inflation for the first quarter of the ongoing financial year came in at 2.7 percent, 20 basis points under the RBI's forecast of 2.9 percent. Further, the continued moderation in inflation suggests that the softening CPI isn't a one-off, but a sustained trend.
On the flip side, core inflation has been inching up, coming in at 4.3 percent, as a result of a negative base effect and higher gold price. "The uptick in core inflation, driven by sticky services and personal care and effects, implies that underlying price pressures haven’t fully dissipated," noted Centrum Broking.
According to experts, this positive surprise, coupled with near-term visibility on lower inflation, might prompt the RBI to lower its inflation forecast for the full financial year, even below three percent.
Japan-based Nomura noted that it expects credit growth to remain subdued and see downside risks to the RBI's FY26 forecasts for GDP growth (6.5 percent) and inflation (3.7 percent). Nomura also trimmed its headline inflation forecast to 2.8 percent from 3.3 percent, well below the RBI’s forecast of 3.7 percent.
According to Emkay Global, the RBI's policy reaction to a much lower-than-forecasted inflation is almost certain. While Emkay sees inflation for FY26 at 2.9 percent, the brokerage added that it is likely that the RBI will reset its FY26 CPI forecasts heavily downward in August meeting.
Also Read | India's retail inflation eases to 6-year low of 2.1% in June
Way ahead?
In the previous Monetary Policy Meeting (MPC), the members decided to cut the key benchmark lending rate by a surprise 50 basis points, ahead of market expectations. Further, the central bank also decided to trim the CRR (cash reserve ratio) by 100 basis points over four phases to enhance liquidity in the system.
While the headline data strengthens the case for a growth-supportive stance, it is unlikely to push the RBI toward aggressive rate cuts in the near term. Instead, the easing cycle is likely to be more moderate.
Based on Emkay's FY26 CPI forecast of 2.9 percent and an unchanged repo rate (5.5 percent), the real rate is implied at 2.6 percent, said Madhavi Arora, Emkay Global. This is much higher than the estimated neutral rate of 1.65 percent, and possibly impinging on growth.
Arora added that with the most recent MPC minutes revealing that some members (Professor Singh) are keeping an eye on the real rate, such dynamics could also create room for further easing, assuming global markets remain tepid.
"While the hurdle for a rate cut at the next meeting in August appears high, we expect 25 bps cuts in each of the October and December meetings to take the terminal rate to 5.00 percent," said Nomura. International brokers Bank of America Securities and Morgan Stanley concurred, believing the price risks in the near-term are contained, but limited action from RBI is expected.
Analysts at Centrum Broking suggested that while headline inflation will stay benign, the persistence of core pressures may keep the RBI cautious. "While further rate cuts remain possible,
their pace will likely moderate, especially if geopolitical tensions or tariff shocks disrupt
the current stability." The brokerage also expects the banking system liquidity to be kept in a surplus for effective monetary policy transmission.
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