Economists lower India inflation forecasts despite August uptick; GST reforms supportive

Core Insights - India's retail inflation increased to 2.1% year-on-year in August 2025, up from 1.6% in July, remaining within the Reserve Bank of India's (RBI) comfort zone of 2-6% [5][12] - The RBI maintained its benchmark repo rate at 6.5% for the eleventh consecutive time, with expectations of a potential cut later in the fiscal year [2][11] - The inflation outlook for FY 2025-26 has been revised downwards from 4% to 3.7% following the recent RBI Monetary Policy Committee meeting [5][12] Inflation Trends - The increase in inflation is attributed to fading base effects, solid demand, and a weakening rupee, with expectations for inflation to accelerate but remain controlled [6][12] - Food prices, which had been moderate, began to firm up, but overall food inflation is expected to stay moderate due to healthy agricultural activity and favorable conditions [9][10] Economic Projections - S&P Global projects CPI inflation to average 3.3% in FY26, down from an earlier forecast of 3.5%, while CareEdge has lowered its projection for FY26 to 2.7% from 3.1% [7][10] - The PHD Chamber of Commerce and Industry anticipates a further decline in CPI inflation aided by GST reforms, which are expected to reduce production costs and stimulate consumption [8][12] GST Impact - GST rationalization is seen as a cushion that could lower CPI inflation by 70-90 basis points annually, assuming effective pass-through to consumers [10] - The proposed GST 2.0 reforms package is expected to simplify the tax structure, further aiding in price stability and consumption growth [8][12]