Inflation undershoots but risks ahead

India's Consumer Price Index (CPI) inflation eased to 2.1 per cent year-on-year in June 2025, down from 2.82 per cent in May.

- KAUSHIK DAS

For the April-June quarter, CPI inflation averaged 2.7 per cent, lower than the Reserve Bank of India's (RBI's) projection of 2.9 per cent. This decline, largely driven by falling food prices, may offer near-term comfort to the Monetary Policy Committee (MPC). However, a forward-looking view suggests that a more cautious approach to interest rates is warranted.

We forecast CPI inflation to average 3 per cent in FY26, significantly lower than the 4.6 per cent recorded in FY25. In the absence of a food price shock, inflation is expected to remain subdued in the near term—around 2.5 per cent in July-September and 2.6 per cent in October-December—well below the RBI's forecasts of 3.4 per cent and 3.9 per cent, respectively. While inflation is likely to converge with the RBI's estimate of 4.4 per cent in the final quarter of FY26, the undershoot in the first three quarters pulls down the full-year average to 3 per cent, 70 basis points lower than the RBI's current forecast of 3.7 per cent.