India's July CPI inflation rose to 4.45% year-on-year, reaching a 19-month high and edging up from 4.38% in June, keeping it above the Reserve Bank of India's 4% target for a second consecutive month. According to the PHD Chamber of Commerce and Industry (PHDCCI), below-average monsoon rainfall and lingering global geopolitical strains are actively squeezing supply chains, driving domestic input and logistical costs upward. Despite un-ideal weather conditions, farmers have remained determined, ensuring that demand for food is met. Additionally, above adequate inventories of staples including rice and wheat have supported domestic availability of food, as noted by Mr. Rajeev Juneja, President, PHDCCI. On a month-on-month basis, headline inflation increased 0.9%, with food prices rising 2% while fuel prices declined.
Core inflation remained sticky at 3.9%, marginally above BofA's 3.8% estimate, despite rising only 0.3% month-on-month. As reported by NDTV Profit, higher input costs are continuing to pass through into restaurants and accommodation, while lower gold prices are offsetting some of that pressure. Core inflation excluding precious metals increased to 2.6% year-on-year from 2.5% in June. BofA continues to forecast FY27 CPI inflation at 4.8%, with risks evenly balanced but tilted towards a gradual rise in the coming months.
Multiple brokerages now expect the RBI to keep the repo rate unchanged at 5.25% through the remainder of 2026, with potential rate hikes emerging only in early 2027 if inflationary pressures broaden. According to Moneycontrol, Elara expects the RBI to remain on hold throughout CY26, with the possibility of a 25-basis-point hike in Q1CY27. Motilal Oswal echoed a similar view, expecting the MPC to keep the repo rate unchanged at 5.25% through CY26 unless food- and fuel-led inflation begins spilling over into core inflation. Barclays is also calling for a pause through the remainder of 2026, expecting FY27 inflation at 4.8% below the RBI's forecast, with the MPC able to look through higher readings as long as increases remain concentrated in food and administered prices.
The Reserve Bank of India delivered what brokerages described as a dovish hold, keeping the repo rate unchanged at 5.25% and retaining a neutral stance. At its August 3-5 MPC meeting, the central bank unanimously kept the repo rate unchanged and retained its neutral stance. As reported by Moneycontrol, Aditi Nayar, Chief Economist at ICRA, expects CPI inflation to rise to 4.7% in August and cross 5% in September. The RBI cut its FY27 CPI inflation forecast to 5% while raising its GDP growth forecast to 6.7%, with inflation expected at 4.7% in Q2, rising to 5.9% in Q3 and 5.5% in Q4. India's inflation picture may look comfortable at first glance, but brokerages see enough pressure underneath to keep the rate debate alive.
Rainfall momentum improved in July after June's 40% deficit, but cumulative monsoon rainfall remained 12% below normal as of August 12. As reported by NDTV Profit, BofA said August rainfall remains critical, with July-August accounting for around 60-65% of the season's rainfall. Meanwhile, the RBI cut its inflation projection by 10 bps to 5% and raised its GDP growth forecast to 6.7%, while lowering its core inflation projection by 40 bps to 4.3%. The other variable affecting RBI's flexibility is the US Federal Reserve, with US CPI inflation moderating to 3.4% year-on-year in July from 3.5% in June, while core CPI eased to 2.5% from 2.6.
