Analysts Lower FY26 CPI Forecast After July Inflation Dip, Below RBI Estimate

India’s retail inflation witnessed a significant easing in July, dropping to 1.6 percent, marking its lowest level in over eight years. This development has led several economists and analysts to revise their Consumer Price Index (CPI) forecasts for fiscal year 2026, anticipating it to fall below the Reserve Bank of India’s (RBI) projections. The lower-than-expected inflation print for July has instilled confidence in the market that the central bank may maintain its accommodative stance for a longer duration.

Key Highlights

• July CPI: India’s retail inflation eased to 1.6% in July.
• FY26 Forecasts Revised: Analysts are trimming their FY26 CPI forecasts, now expecting them to be below RBI’s estimates.
• RBI Estimate: The RBI has projected a CPI of around 4% for FY26.
• Impact on Monetary Policy: The lower inflation could lead to the RBI maintaining its current monetary policy stance.
• Bond Yields: The decline in CPI has resulted in lower bond yields.

  Also Read: Nifty, Sensex Surge on Positive Economic Data and Rate Cut Expectations

Market Reaction

The stock market has reacted positively to the news of easing inflation. The anticipation of a continued accommodative monetary policy by the RBI has boosted investor sentiment. Specific impacts include:

• Equity Markets: Indices like the Nifty and Sensex have seen an uptick, driven by sectors such as banking and finance, which are particularly sensitive to interest rate movements.
• Bond Market: Government bond yields have declined, as lower inflation expectations reduce the attractiveness of higher yields. This benefits banks holding large government bond portfolios.
• Rupee: The rupee has experienced relative stability, supported by expectations of continued foreign capital inflows attracted by the strong economic growth and stable inflation outlook.

Expert Insights

Several economists and market analysts have shared their perspectives on the recent inflation data and its implications:

• Lower Inflation Trajectory: Most experts believe that the downward trend in inflation is likely to continue, driven by factors such as favorable base effects, moderating food prices, and a stable global commodity environment.
• RBI Policy Stance: Experts suggest that the RBI is likely to maintain its current repo rate and accommodative stance in the upcoming policy meetings, focusing on supporting economic growth while keeping a close watch on inflationary pressures.
• Impact on Corporate Earnings: Lower input costs resulting from lower inflation could boost corporate earnings, particularly for companies in sectors such as consumer goods, manufacturing, and automobiles.

Detailed Analysis

The significant drop in July’s CPI is attributed to several factors, including a favorable base effect from last year’s high inflation, a moderation in food prices due to good monsoon rainfall, and stable global commodity prices. The core inflation, which excludes food and fuel components, has also shown signs of easing, indicating a broader moderation in price pressures.

Looking ahead, the key risks to the inflation outlook include potential supply-side disruptions, a resurgence in global commodity prices, and any unexpected depreciation in the rupee. However, the consensus among economists is that the RBI is well-equipped to manage these risks and keep inflation within its target range.

Conclusion

The lower-than-expected inflation data for July has instilled optimism in the market and prompted analysts to revise their FY26 CPI forecasts downward. This development is expected to support a continued accommodative monetary policy stance by the RBI, which in turn is likely to benefit the equity and bond markets. Investors are advised to remain cautious and monitor the evolving macroeconomic situation closely.

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