Low inflation to give RBI space to cut rates by 50 bps this year: Report

Persistently low food prices, GST reductions, and subdued input cost pressures are expected to extend the current trend of subdued headline CPI inflation. Economic forecasts suggest the Reserve Bank of India could implement two 25-basis-point rate cuts in October and December, with annual CPI inflation projected to average 2.4% throughout FY26.

For seven consecutive months, headline CPI inflation has remained below the RBI’s 4% target, partly due to declining food prices. Meanwhile, core inflation has stabilized at 4.2%, with the underlying inflation measure maintaining a 22-month streak below 4%, signaling sustained price moderation.

Multiple factors contribute to this disinflationary trend, including sustained food price softness, improved agricultural output, and GST rate rationalization. Sensitivity analyses indicate these combined elements could reduce aggregate price levels by 50-60 basis points.

The report projects second-half FY25 CPI inflation averaging 2.6% year-on-year, with full-year FY26 inflation expected at 2.4%.

Analysts cautioned that while GST reductions may stimulate domestic demand in H2 FY26, external risks remain. Potential headwinds include adverse tariff impacts and ongoing U.S. trade negotiations, which could dampen external demand.

Key monitoring areas include monsoon patterns affecting summer crops, GST modifications’ impact on consumption and inflation transmission, global trade developments, and the Federal Reserve’s monetary policy trajectory.