India’s CPI inflation moved up in the month of Aug-25, coming in at 2.07%YoY compared to a near 8-year low of 1.61% in Jul-25 (revised upwards from 1.55%). The acceleration was in line with market expectations, as median Refinitiv consensus estimate stood at 2.1%. As such, Aug-25 marked the seventh consecutive CPI inflation reading below 4.0% target.

o   Key highlights of Aug-25 data

• On a sequential basis, CPI posted an increase of 0.46%MoM, lower than average increase of 0.60% usually associated with the month of August. 
• Annualised food inflation moved into positive territory in Aug-25 after a gap of two months, coming in at 0.05%YoY. 
  1. On sequential basis, price pressures were seen in sub-categories of Vegetables (3.4%MoM), Oils & Fats (1.9%MoM), and Sugar & confectionary (0.7%MoM)
     • Oil & fats inflation now stands at a 44-month high of 21.2%YoY in Aug
  2. The upside was however capped by sequential decline in sub-categories of Eggs (-1.86%), Meat & fish (-1.18%MoM), Pulses & products (-0.43%MoM) and Spices (-0.05%).
     • Pulses inflation is at a 90-month low of -14.5%YoY in Aug-25, on the back sustained sequential price correction over the last 10 months. 
• Consolidated fuel inflation inched lower to 2.0%YoY from 2.1% in Jul-25. Sequential increase in the price of Kerosene, Charcoal, Coal, and Dung Cake was offset by a decline in the price of electricity. 
• Core CPI inflation (represented by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) posted a marginal increase to 4.3% YoY from 4.2% (revised up from 4.0% computed earlier) in Jul-25. 
  1. Yet again, price pressures continue to be driven by precious metals within the Miscellaneous sub-category. As such, after stripping off gold and silver, core inflation would have printed at 3.0%YoY.

Inference and Outlook

Taking on board Aug-25 inflation print, the FYTD average CPI inflation for FY26 stands at 2.4%, i.e., nearly half of the 4.4% over the same period last year. The softening has been primarily driven by a sharp contraction in vegetable prices on an annualized basis. 

Outlook for food inflation for the remainder of FY26 continues to remain benign, amidst a bumper crop from last Rabi season, above normal monsoon rains so far in the season (8% surplus), good progress of area sown under Kharif crops (+4.0%YoY) and restrained MSP hikes this year. Having said, adverse impact of surplus rains in Sep-25 on standing crops in several parts of the country, will be on close watch. 

Since last month, one major development that is likely to have a bearing on inflation in the coming months is the rationalization in GST rates, slated to be implemented from 22nd Sep-25 onwards. The revised tax structure is premised on two slab rates i.e., – 5% and 18%. As such, a lot of items of daily consumption, healthcare products, FMCG products, consumer durables and select services, which were taxed earlier at a higher rate, are likely to see a decline in tax incidence. On paper, the disinflationary impact owing to lower rates could be northwards of 100 bps on an annualized basis. Having said, the actual passthrough is likely to be gradual and limited, especially in the initial months as –

1. Producers let go of current inventory procured at higher GST rates at discounted pricing, thus bearing some losses.
2. Vantage price points such as Rs 5/10/20 packs may be retained by producers, especially in FMCG sector. 
3. Price reduction in unorganized sectors comprising of small and medium enterprises may be more gradual and also harder to track.

On the other hand, downside in CPI will also be limited by –

1. Core inflation pressures as recovery in domestic consumption gathers pace, led by urban consumption amidst support from FY26 budgetary provision of income tax relief, transmission of past monetary policy rate cuts and GST rate cuts in the offing. 
2. Imported inflation stemming from rupee weakness. The 3.2% depreciation in Rupee on a FYTD basis, could intensify if tariffs are not negotiated at lower levels comparable to most peers. 
3. Price of precious metals could remain firm amidst heightened geopolitical and geoeconomic uncertainty. 

Taking into account the above-mentioned factors, we revise lower our FY26 CPI inflation forecast to 2.6% from 3.0% earlier.

Table1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket.

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI.

3) Readings under the memo items are derived from imputed indices. Figures have been rounded off.