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Retail and wholesale price indicators point to easing price pressures in India, despite seasonal forces. CPI inflation in June eased to 2.1% yoy (DBSf: 2.1%, consensus: 2.3%), near the lower end of the target range and marking the slowest rise in over six years. Despite the sequential jump in perishables especially vegetables, the broader food basket remained on a disinflationary path led by cereals and pulses. Core inflation rose to 4.4% yoy from 4.2%, but core-core (ex-food, fuel, precious metals) stayed benign, reflecting slack in the economy, which was also mirrored in the sub-1% core WPI (non-food manufacturing) inflation. 1QFY inflation averaged ~25bp below RBI’s forecast, with 2Q prints also set to undershoot the central bank’s forecast path, assuming a normal monsoon and limited disruptions to food supplies. Incoming high frequency data pegs July inflation below 2% at this juncture.
Considering the softness in incoming activity indicators (e.g. production, credit growth, auto sales), and below-projected inflation in 1HFY26, the RBI monetary policy committee will be inclined to ease rates further. In August, policymakers might clarify the policy stance in midst of confusion over near-term guidance, after the monetary policy committee (MPC) voted to shift back to the ‘neutral’ stance in June, effectively raising the bar for further rate reductions. The prevailing significant real rate buffer of over 300bp is expected to convince the MPC to incrementally lower rates further, with our baseline now revised to include another 50bp of cuts to 5.0% in this cycle, vs 5.5% previously.
Separately, WPI inflation for June declined -0.1% yoy in June, posting the slowest rise since 3Q23, with the downshift predominantly driven by the food (-0.3% y/y), primary articles (-3.4% yoy) and fuel (-2.7% y/y), while the heavyweight manufacturing products held steady at 2.0% y/y. Amongst sub-industries, price pressures rose in pharma, transport equipment, and electronics prices rose, whilst those in basic metals, food products, and tobacco declined. The core gauge i.e. non-food manufacturing was up 0.95% yoy, firmer than May. Despite the geopolitics driven surge in crude prices in the month, wholesale inflation did not reflect the upmove with a largely stable rupee, with tepid pricing power keeping producer prices in check.
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