August inflation climbs past 2%, tempering expectations of rate cut
What's the story
India's retail inflation (CPI) has risen slightly to 2.07% in August, after hitting a record low of 1.55% in July. The rise is mainly due to the increase in food and beverage prices. Core inflation, which excludes food and fuel, also increased to 4.16%. According to SBI Research, this could affect the Reserve Bank of India RBI)'s monetary policy decisions in the coming months.
Report findings
Rate cuts in October may be challenging
SBI Research has released a report suggesting that the rise in CPI above 2% could complicate the RBI's decision to cut interest rates in October. The report states, "With August inflation print a tad higher than the 2% mark, a rate cut in October looks onerous." It also casts doubt on the possibility of a December rate cut if growth estimates for Q1 and Q2 are taken into account.
Tax adjustments
GST rate changes could further reduce inflation
The SBI Research report also highlights that changes in GST rates on services could further reduce inflation on non-food items by 40-45 basis points, assuming a 50% pass-through. The government has slashed GST rates on several essential items (around 295), bringing them down from 12% to either 5% or zero. This move could cut inflation in these items by 25-30 basis points in FY26, assuming a 60% pass-through to consumers.
Regional disparities
Kerala's inflation spikes due to rising coconut oil prices
In August, 26 out of 35 states and union territories recorded inflation below 4%. Only Kerala and Lakshadweep saw inflation above 6%. Notably, Kerala witnessed an extraordinary spike in inflation at 9.04%, driven by a sharp rise in coconut oil prices, a staple in the state. Rural and urban inflation in Kerala reached as high as 10.05% and 7.19%, respectively.
Weather impact
Heavy rainfall could drive up food prices
Heavy rainfall in key agricultural states such as Punjab, Haryana, Rajasthan, and Gujarat could affect food supply and drive up food prices in the coming months. The period between August and early September saw rainfall nearly 9% above normal across India, with some states witnessing even higher levels. This could further complicate RBI's monetary policy decisions amid rising inflationary pressures.