Less need seen for additional stimulus at this juncture
FinTech BizNews Service
Mumbai, September 12, 2025: Radhika Rao, Executive Director and Senior Economist at DBS Bank, has come out with a research report on India’s retail inflation (August):
August inflation ticks up
• August inflation rose 2.07% yoy, in line with our forecast, returning to the lower bound of the
target range (+/-2% around 4% midpoint). This marks a rise for the first time in nearly ten
months and compares to 1.6% in July.
• FY26 YTD inflation stands at average 2.35% yoy, vs 4.6% in FY25 (full year).
Key takeaways:
• Service/ misc category (including personal care) was the main contributor to the headline (1.4pp), with food inflation punching way below its weight.
• In terms of trend, the scale of disinflation in the food segment eased up on yoy basis, at - 0.7% y/y vs -1.8% month before. Amongst the sub-segments, vegetables, pulses, spices continued to decline on yoy basis, partly due to a high base. Cereals rose but at a slower pace than month before, while edible oils quickened to 21% yoy, besides egg and seafood.
• Fuel related segments reflected the yoy rise in non-subsidized LPG, apart from which
imported fuel price pressures were benign.
• Miscellaneous inflation, including precious metals, was high, but steady at 5% yoy.
• Core inflation (ex food and fuel) rose by 4.1% yoy, on higher gold. Core-core (ex fuel, transport, food, precious metals) eased slightly to 3.2% from 3.3% month before.
• Trimmed measures were benign.
• We see modest downside risks to our FY26 forecast at 2.8% yoy (RBI at 3.1%)
• At current levels, inflation is not a concern for policymakers, with passage in base effects
expected to lift readings here on, though partly mitigated by indirect tax cuts. Jul-Aug inflation stands at 1.84% yoy vs the RBI’s projected 2QFY projection at 2.1%. We see downside risks to RBI’s full year forecast.
Policy outlook
• Minutes from the August policy meeting, where members had voted unanimously to leave rates unchanged, showed that the RBI MPC was concerned over the fallout of tariff developments. To recall, by early-August, US had announced the first 25% baseline tariff on India, with another 25% imposed subsequently.
• Views diverged between the external and RBI members, with the latter pointing to economic resilience in the face of trade tensions, while the external representatives were more apprehensive. Even as inflationary expectations remain well anchored, retail inflation hit bottom in July and is expected to inch up August onwards on receding base effects and seasonal lift in sequential pressures in food.
• Besides inflation, October rate review is likely to take stock of other developments, including the penal tariff imposition, S&P rating upgrade, pipeline GST relief and US Fed’s move.
• The MPC is likely to be guided by growth rather than inflation in the months ahead. Growth beat expectations in 1QFY26, and with a likely 7%+ reading in 2QFY on the cards, we see less need for additional stimulus at this juncture.
• Our baseline path does not have any rate cuts, with a shift to resume easing to require a stronger concern overgrowth and factor in lags in policy transmission (to provide forward looking stimulus).
• The cabinet is reportedly mulling over a support package for exporters to offset the impact of the US tariffs, including
collateral-free and cheap credit, dipping into the INR 22.5bn tranche demarcated in the budget for export promotion.
• On the markets end, INR bonds took a breather after a tough August, trimming losses witnessed in the past fortnight. In absence of steps to support markets, either through bond purchases in the secondary market, dovish guidance or moves to trim supply, the scope for one-sided rally in benchmark bonds in the near-term remains limited.
• Rupee has been under pressure. The INR slipped to a fresh low on Thursday below 88.40/USD, emerging as a regional underperformer (-3.2% YTD), but helping to partly offset the impact of steep tariffs. On real effective exchange rate basis, the currency is likely slightly undervalued compared to trading partners (Jun, Jul25 was 99.7 and 100.1 respectively).
