Will Inflation Stay Below 4 Percent for the Next Two Quarters?
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Synopsis
A recent report forecasts that India's headline inflation will likely remain under the Reserve Bank of India's target of 4 percent for the next two quarters. This outlook is supported by favorable base effects and muted food prices, raising questions about future economic trends.
Key Takeaways
- Inflation expected below 4% for next two quarters.
- Food prices are a key factor in lower CPI inflation.
- Potential rise in inflation from the third quarter.
- FY26 CPI inflation forecasted at 3.1%.
- Foreign exchange reserves are strong at $695 billion.
New Delhi, Aug 2 (NationPress) A recent report indicates that headline inflation in India is likely to remain below the Reserve Bank of India’s (RBI) 4 percent target for the upcoming two quarters, aided by a favorable base effect and subdued food prices.
According to data compiled by CareEdge Ratings, the recent decline in inflation can be attributed primarily to easing food prices, with the Consumer Price Index (CPI) inflation dropping to 2.1 percent in June 2025 — marking the lowest level since January 2019.
The report suggests that although inflation is projected to stay low in the short term, it may begin to rise in the third quarter and exceed the 4 percent threshold in the final quarter of the current financial year as the base effect diminishes.
For FY26, the agency anticipates the CPI inflation to average around 3.1 percent, which is below the RBI’s forecast of 3.7 percent.
“However, due to the low base in FY26, inflation is expected to increase to approximately 4.5 percent in FY27,” the report highlighted.
The significant decline in June inflation was driven by deflation in food and beverages, particularly vegetables, pulses, spices, and meat.
Nevertheless, prices of edible oils and fruits continue to exhibit double-digit inflation.
While the high prices of edible oils pose a challenge due to India’s reliance on imports, the report notes that the recent reduction in customs duties and favorable kharif sowing should alleviate pressures in the coming months.
As the RBI has already implemented rate cuts and ensured surplus liquidity, it is likely to maintain rates during the upcoming August monetary policy meeting.
The central bank may take a cautious approach to evaluate the impacts of previous rate cuts, especially as the US Federal Reserve keeps a hawkish stance and the dollar strengthens.
Despite external challenges, India’s foreign position remains robust, with foreign exchange reserves at $695 billion and a current account deficit projected at only 0.9 percent of GDP in FY26.
Strong services exports are expected to continue bolstering the external sector, according to the report.
Point of View
I believe the current economic indicators suggest a cautious optimism regarding inflation. While the report highlights a temporary lull in inflation rates, we must remain vigilant about potential fluctuations that could arise with changing economic conditions. Our focus should remain on supporting sustainable growth while monitoring inflation trends closely.
NationPress
20/08/2025
Frequently Asked Questions
What is the expected inflation rate for India in the next two quarters?
The expected inflation rate for India is projected to remain below the Reserve Bank of India's target of 4 percent.
What factors are contributing to low inflation rates?
The low inflation rates are attributed to a favorable base effect and subdued food prices.
When might inflation rates start to rise again?
Inflation rates may start to rise from the third quarter and could exceed 4 percent by the last quarter of the financial year.
What is the forecasted average CPI inflation for FY26?
The forecasted average CPI inflation for FY26 is around 3.1 percent.
How is India's external economic position?
India's external economic position remains strong, with foreign exchange reserves at $695 billion and a current account deficit projected at just 0.9 percent of GDP in FY26.
