Retail inflation seen to remain low as GST rate cuts come into play

Even as retail inflation climbed up marginally in August, it is seen to remain low in coming months as the effects of the rate cuts under the goods and services tax come into play and analysts expect the Reserve Bank of India to maintain a status quo on rates in the upcoming policy.

Retail inflation as measured by the consumer price index-based inflation or retail inflation rose up to 2.07% in August from 1.61% in July this year. However, it was much lower than 5.66% in August last year.

Official data released on Friday revealed that food inflation as measured by the consumer food price inflation remained in negative territory at -0.69% in August this year rising from -1.76% in July.

“An increase in headline inflation and food inflation during the month of August is mainly attributed to increase in inflation of vegetables, meat and fish, oil and fats, personal care and affects, egg,” said an official release.

Vegetable inflation remained in negative territory at -15.92% in August rising from -20.69% in July.

Paras Jasrai, Associate Director at India Ratings and Research noted that the flood situation has resulted in deflation in food prices reducing to 0.69% in August 2025, thereby pulling the retail inflation up from a 97-month low of 1.6% in July 2025. “Within food, tomato prices were up 16.9% year on year in August 2025 after a gap of seven months. The producers of food (rural areas) are having lower inflation than the consumer of food (urban areas),” he said. In FY26, inflation is likely to average 3%, he further said.

While GST rate cuts will come into effect from September 22, analysts expect the full impact to be seen in October.

“The GST benefits on FMCG products as well as household goods (2.5%) will be felt partly in September and largely from October onwards,” said Madan Sabnavis, Chief Economist, Bank of Baroda, adding that inflation is likely to average 3.1% this year.

Noting that the inflation number is more on expected lines, Sabnavis further said that it is unlikely to alter the RBI view on policy rates. “Inflation was anyway to be benign going by RBI forecasts and the focus would be more on growth. Given the stable GDP path expected, we may expect status quo in rates and stance this policy,” he said.

The Monetary Policy Committee of the RBI is set to meet later this month from September 29 to October 1. It has already cut rates by 100 basis points this calendar year in order to boost growth. It had projected inflation at 3.1% for this fiscal in its last meeting from August 4-6.

Hanna Luchnikava-Schorsch, Head of Asia-Pacific Economics at S&P Global Market Intelligence said the agency expects inflation to accelerate further in coming months, although the effects of GST rate cuts should lower the pace of acceleration from October onwards, keeping the headline inflation rate within or near the central bank’s 4% target range midpoint through the end of 2025.

"Overall, we project CPI inflation to average 3.3% in the current fiscal year, down from 3.5% expected prior to the GST reform announcement,” she noted.