- Cumulative monsoon run rate is above normal, with unevenness in its spatial distribution.
- There are three drivers behind the ongoing disinflationary spell in FY26.
- A reversal likely lies ahead, akin to episodes in the previous years.
- A revamped CPI series will be released in early 2026 which might influence the trend.
- Policy transmission is underway, but lopsided.
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Monsoon rings in cheer
Strong monsoon last year and an encouraging run-rate this year have aided the broader food disinflationary trend. Cumulative southwest monsoon rainfall across India remained above normal as of 24-Jul, at 5% higher than the long-period average (LPA). Northwest and central India received surplus rains in range of 21-25%, whilst east/ northeast regions faced a 25% shortfall compared to LPA. The southern peninsula was a modest 1% below LPA.
Inflation on a slippery slope
Inflation (June’s 2.1%) is presently at the slowest pace since the pandemic. With high frequency food data pointing to subdued price pressures in July, it may be heading below 1.5%, a fresh low. Apr-Jun25 (1QFY) inflation averaged 2.7%, ~20bp below the central bank’s quarterly forecast profile. Our gauge of the inflation momentum also signals a weak phase.
The disinflation tend is broad. Only 18% of the basket is growing above the RBI’s target range (6%) by Jun-25, down from 25% at the start of 2025 and over 50% soon after the pandemic. About 70% of the basket is growing below 4% - mid-point of the central bank’s target.
There are three reasons behind the current disinflationary phase:
First, Food makes for bulk of the correction. From 5.7% yoy in Jan25, the segment slipped into deflationary territory in Jun25, a first since February 2019. This in effect led the contribution of the F&B segment to decelerate from 2.7percentage points to shaving -0.1ppt from the headline by Jun25.
Second, service component, second biggest weight in the basket is firm owing to one sub-segment which is punching above its weight, excluding which pressures are benign. The sub-segment Personal care and effects jumped from average 8% in CY2024 to 13% yoy in 1HCY25, almost entirely due to strong gains in precious metals. Apr-Jun25 registered a further 14% yoy on this account.
Third, stable core and core-core price pressures. Core inflation (ex-food, fuel) outpaced headline inflation since February 2025, with much of the upmove driven by precious metals (as discussed in the previous section). For the year, we expect core inflation to average 4.4% yoy this year vs 3.5% in FY24.
Core-core inflation (ex-food, fuel, transport and precious metals), by contrast, has more benign, averaging 3.2% yoy in Jan-Jun25 and is likely to stay below 4% this year.
Policy transmission
The central bank has been vocal in highlighting the need for hastened policy transmission, after 100bp reduction in the repo rate in 1HCY25. Mapping rates in this period (see chart), market borrowing costs have reflected more of the policy easing rather than the bank borrowing costs. Encouragingly, the share of EBLR (external benchmark lending rate) in outstanding floating rate rupee loans, stood at 60.6% as of Dec-24 vs 35.9% for MCLR (Marginal cost of funds lending rate).
Rate cuts to be frontloaded
Against this backdrop and conciliatory comments from the RBI Governor after the June meeting, we expect rest of the policy easing to be frontloaded to second half of 2025. We expect 50bp more rate cuts within CY2025, of which the first 25bp rate cut is likely in August. The RBI is also likely to revise down their FY26 inflation projection by at least 40-50bp vs the current 3.7%.
The Statistics agency is due to release the revamped CPI index series in 1QCY26, with 2024 as the new base year vs 2012 at present. The index will carry new weights, following the recommendations of the Household Consumption Survey 2023-24 which had pointed to a shift in spending patterns amongst households, in urban and rural areas. Amongst key findings were the fall in % share of food in monthly per capita consumption expenditure (MPCE) in rural areas – from 52.9% in 2011-12 to 47% in 2023-24. For urban areas the respective ratios were at 42.62% and 39.68% respectively. The outcome is likely to witness a reduction in the absolute weight of food (and beverages) products be lowered from the current 45.9% and redistributed amongst non-food sectors particularly services. State level data will also be made available to improve granularity, besides rural and urban breakdowns, as is the case currently. The revamped series is expected to have a wider and more relevant inflation basket.
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