Improving macros: on the outlook for inflation

Neither the government nor the RBI will likely be alarmed by the rise in retail inflation in August 2025, even though it snapped a nine-month streak of declining inflation rates. At 2.1%, it is just marginally within the RBI’s comfort band of 2%-6%, with no real macroeconomic risk. The government would be glad to see food inflation remaining subdued at the urban and rural levels. Especially heartening would have been the 15.9% and 14.5% contraction in the prices of vegetables and pulses, respectively. When combined with the free foodgrains provision under the National Food Security Act, this downward movement in food prices ensures affordable supplies of these necessities. Other necessities, such as clothing and footwear, housing, and fuel and light, are all seeing inflation remain low, and lower in August than in July. As things stand, India’s macroeconomic outlook looks the exact opposite of what it was last year. From a relatively low growth, high inflation scenario, India is now witnessing high growth and low inflation. In other words, the differential between growth and inflation at this time last year was about 2.1 percentage points. This year, it is about 5.5 percentage points, a welcome and large gap. Of course, there are legitimate questions to be asked about GDP and inflation data, but those questions were valid last year as well, and so do not erode the comparability of the two years.

Looking ahead, the overall outlook for inflation continues to appear benign. Even if India decides to accede to the U.S.’s demands and abandon its purchase of Russian oil, the economic impact is likely to be limited. Global crude prices are relatively low, and so the discount Russia is able to provide is not as attractive as it was in 2022. The cost increase of switching to other countries for oil is, therefore, likely to be limited. As a result, the impact on inflation within India is also likely to be limited, if such an eventuality comes to pass. On the other hand, the new GST rates will come into effect from September 22. With most prices set to come down due to their rates being cut, the impact on the inflation rate is also going to be in the same direction. The low inflation rate and high growth in Q1 have raised expectations that the RBI’s Monetary Policy Committee will cut interest rates further in its next meeting at the end of September. However, given the ongoing global uncertainties, this might be premature. Depending on how the renewed bonhomie between India and the U.S. progresses, a rate cut in December is the more likely outcome.