India’s retail inflation saw a slight rise in August, moving to 2.07 percent. This marked an end to the ten-month cooling streak that had kept inflation consistently declining. Even with the marginal uptick, the number remained comfortably below the 3 percent mark for the fourth consecutive month. The rise followed an eight-year low of 1.61 percent recorded in July, according to the data released on September 12.

Inflation Trend and Policy Outlook

Economists noted that the rise in inflation is not alarming and will not disturb the Reserve Bank of India’s (RBI) approach to monetary policy. The central bank had earlier forecast benign inflation levels, and its focus is more likely to remain on economic growth than on price pressure.

Madan Sabnavis, Chief Economist at Bank of Baroda, explained that the data is in line with expectations and should not impact the RBI’s stance. He stated that inflation was already projected to stay mild based on the central bank’s outlook, and with stable GDP growth trends, there is little reason to expect a change in the policy rate in the upcoming review.

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RBI’s Monetary Policy Ahead

The RBI’s Monetary Policy Committee is scheduled to hold its next meeting from September 29 to October 1. Since the start of the year, the central bank has already delivered a total of 100 basis points in rate cuts, bringing the repo rate down to 5.5 percent.

Economists expect the RBI to continue with its current approach. Aditi Nayar, Chief Economist at ICRA Ltd., stated that average CPI inflation for FY2026 is likely to settle around 2.6 percent. She added that October and November 2025 could mark a fresh low in inflation before the trajectory begins to slope upward. According to her, stronger-than-expected GDP growth in the first quarter of FY2026 and the benefits of GST reforms on growth in the later quarters point towards no immediate change in repo rates at the October policy review.

Food Prices in Deflation

One of the most significant features of the August data was the continuation of negative inflation in food prices. Food inflation stayed in deflationary territory for the third month in a row, registering a decline of 0.69 percent. In comparison, the drop in July was sharper at 1.76 percent.

Cereal prices eased further, touching a 44-month low. Inflation in cereals fell to 2.7 percent in August, compared to 3.1 percent in July. Vegetables and pulses remained in deflation for the seventh consecutive month. Vegetables saw a decline of 15.9 percent, while pulses fell by 14.5 percent. In July, the fall had been steeper for vegetables at 20.7 percent, while pulses saw a 13.8 percent decline.

Oils See Sharp Price Rise

In contrast to falling prices in food staples like cereals, vegetables, and pulses, oil prices showed significant inflation. Oil inflation surged to a four-year high of 21.2 percent in August. Mustard oil rose by 24.2 percent, while refined oil prices increased by 23.5 percent. Coconut oil recorded the sharpest rise, with prices jumping 133.1 percent compared to last year.

Miscellaneous Goods and Precious Metals

Apart from oils, inflation was also evident in miscellaneous goods. This category saw inflation rising slightly to 5.05 percent in August, compared to 5 percent in July. The jump was largely influenced by higher prices of gold and silver. Gold prices rose by 40.3 percent, while silver prices climbed by 31.8 percent over the previous year.

GST Rate Cuts and Their Impact

Looking ahead, economists pointed out that the recent changes in GST rates could help bring some relief to inflation. The GST Council, in its September 4 meeting, announced a rationalisation of tax rates. Analysts suggest that if the cuts are fully passed on, headline inflation could reduce by as much as 100 basis points, or one percentage point.

Prices of several core goods and some food items are expected to ease once the cuts take effect. For instance, products like butter, ghee, and even services such as beautician services may become cheaper. The GST changes are set to take effect from September 22, and analysis indicates that nearly 14 percent of the inflation basket will turn cheaper once the cuts are reflected in consumer prices.

Hanna Luchnikava-Schorsch, Head of Asia-Pacific Economics at S&P Global Market Intelligence, said that inflation may accelerate further in the coming months. However, the GST rate cuts would soften the pace of this rise, keeping inflation close to the RBI’s target range of 4 percent through the end of 2025.

Economists’ Inflation Forecasts

Despite the short-term rise in August, inflation levels are still considered stable by most economists. Estimates suggest that average retail inflation could remain around 3.3 percent in the current fiscal year. This is still within comfortable limits and below the central bank’s upper tolerance.

ICRA’s Aditi Nayar reiterated that while inflation may see a fresh low around October-November 2025, the overall trajectory is expected to turn upward afterwards. Yet, with the positive momentum in GDP growth and the potential boost from GST reforms, inflation is not projected to breach levels that would cause concern for policymakers.

Balancing Growth and Inflation

The RBI has made it clear in recent months that its policy direction is increasingly focused on sustaining economic growth while keeping inflation under control. With inflation well below the 3 percent mark and GDP performance exceeding forecasts, the central bank has more room to continue its growth-oriented stance.

The data from August reflects both the strengths and challenges of the current inflation scenario. On one hand, persistent deflation in food prices is providing a cushion to consumers and policymakers. On the other, sharp increases in oil prices and precious metals highlight the volatility in certain sectors.

Conclusion

Retail inflation’s rise to 2.07 percent in August, after hitting an eight-year low in July, is seen as a marginal shift rather than a trend reversal. Food inflation continues to play a stabilising role, while oil and metal prices exert upward pressure. Economists and analysts agree that the RBI is unlikely to alter its monetary stance in the near term, especially with its focus set on growth. The upcoming policy review in late September and early October is therefore expected to maintain the current status quo on rates.

With GST rate cuts set to become effective, the coming months could see some moderation in inflationary pressures. While economists predict inflation to remain below 3.3 percent for the year, they also caution about a possible upward trend in the longer run. The August data underscores the delicate balance that policymakers need to maintain between supporting growth and keeping inflation in check.

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