KEY TAKEAWAYS:   India’s CPI inflation held steady at 4.4% YoY in Jul-26. Annualised inflation under food, fuel, and core categories stood at 5.2% (up 10 bps vs. Jun-26), 4.6% (up 10 bps vs. Jun-26), and 3.9% (unchanged vs. Jun-26) respectively. Core inflation remained unchanged for the third consecutive month, aided by the favourable base of the Sep-25 GST rate cut and the correction in precious metal prices in recent months. The GST-linked favourable base lasts one more month; its reversal will remove a key offset to the sectoral price pass-through already underway. Cumulative southwest monsoon rainfall is 12% below normal (as of Aug 12th) with an uneven spatial spread, while kharif sowing is lower by 1.8% YoY as of Aug 7th. Overall, we maintain our FY27 CPI inflation forecast of 5.1%, up from 2.1% in FY26. This rests on an average crude oil price of USD 80-85 pb for FY27, coupled with a 10% cumulative rainfall deficiency during the southwest monsoon season.

India’s CPI inflation* held steady at 4.4% YoY in Jul-26, similar to the Jun-26 print. The outturn was broadly in line with the market consensus expectation of ~4.4%. While still comfortably within the policy target band of 2-6%, CPI inflation now stands at a 19-month high and has remained above the 4% target for a second consecutive month.

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* All annualized inflation numbers in this report have been derived from their respective underlying indices as reported by MOSPI and subsequently rounded off to the first decimal place.

 

Key highlights of Jul-26 data

• On a sequential basis, CPI rose by 0.88% MoM in Jul-26, marginally lower than the series median increase of 0.96% typically recorded in the month of July.
• Annualised Food & Beverages inflation rose further to a series high of 5.2%, up from 5.1% in Jun-26. The underlying index posted a sequential increase of 1.98% MoM – the strongest on the new series.
  1. Sequential build-up in price pressures was led by Vegetables (in particular kitchen staples such as ginger, garlic and onion), followed by Ready-made food items, Meat, Fruits & Nuts, and Sugar & Confectionery.
  2. Partially offsetting this, categories such as Milk & milk products, Edible oils, and Fish & other seafood registered a moderation in their sequential price build-up.
• Consolidated fuel inflation firmed up to 4.6% YoY from 4.5% in Jun-26. This reflects the residual pass-through of the earlier hike in retail prices of petrol and diesel, accompanied by a gradual build-up of second-order effects.
• Core CPI inflation (represented by the CPI excluding food and beverages and all fuel items) remained unchanged at 3.9% YoY for the third consecutive month. Firmer prints in Information & communication, Housing, Education services, Furnishings, and Restaurants & accommodation services were offset by a downside in Personal care, social protection & miscellaneous items (led by Jewellery & watches) and Recreation, sport & culture.

Inference and outlook

Headline inflation continues to be driven primarily by food and fuel, even as core inflation has remained remarkably stable. The steadiness in core, however, owes considerably to two factors – the favourable statistical base of the Sep-25 GST rate reduction that continues to linger, and the sharp correction in precious metal prices in recent months (between Jul-26 and Feb-26, gold and silver prices corrected by 19% and 29%, respectively).

Combined with the annualised weakness in the INR, this raises the risk of a more visible transmission of higher imported prices, particularly into the upcoming festive season which typically witnesses seasonally strong consumption demand.

 

The second-round pass-through is also broadening. Price pass-through of this nature typically takes about two quarters to peak. Meanwhile, the partial transmission is already evident – in consumer durables such as air conditioners, fans, televisions and appliances; in non-durable goods such as biscuits, detergents and soaps; and in travel and hospitality services.

 

The apparent calm in core is therefore partly statistical in nature. The favourable base emanating from the Sep-25 GST rate reduction will turn adverse from Sep-26. In addition, the correction in precious metal prices now appears to be reversing (gold and silver prices are up by ~3% and ~6% in Aug-26 so far). On the monsoon, distribution has been concerning:

• Rainfall deficiency is more pronounced in Southern and North-Eastern India
• The likelihood of a strong to very strong El Niño through Aug-Sep-Oct 2026 remains high – this could potentially create further unevenness, thereby posing risk to cropping, storage and price cycles, especially for perishables. 

 

Higher inflation prints are also beginning to feed into expectations – household inflation expectations have remained above 9.0% for both the 3-month and 1-year ahead horizons across the last three rounds of the RBI survey, raising the risk of second-round effects.

 

For Apr-Jul FY27, CPI inflation has averaged 4.1% YoY compared with 2.6% over the corresponding period in FY26. Looking ahead, we expect the trajectory to steepen from Sep-26 onwards as the GST-related favourable base reverses and the impact of a deficient and erratic monsoon on kharif output trickles through. As per RBI projections, headline inflation is set to climb to 4.7% in Q2 FY27 and remain above 5% over the subsequent three quarters. Overall, we maintain our FY27 CPI inflation forecast of 5.1%, up from 2.1% in FY26. This rests on a base-case scenario of an average crude oil price remaining in the USD 80-85 pb range for FY27, coupled with a 10% cumulative rainfall deficiency during the southwest monsoon season. 

 

  

Table 1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes the group Electricity, gas and other fuels under the Household, water, electricity & other fuels division, and Diesel, Petrol and natural gas (CNG) items from the Transport division.

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

3) Readings under the memo items are derived from imputed indices.

4) All YoY figures have been rounded off to the first place of decimal.

Chart 1: Rainfall momentum has slipped once again after witnessing an improvement in July