India’s retail inflation outlook for the first quarter of FY26 (April to June 2025) is projected to be lower than the Reserve Bank of India’s (RBI) forecast of 2.9%, according to a comprehensive assessment released by Bank of Baroda (BoB). The report is based on high-frequency price data, particularly from June 2025, and suggests that moderating food prices and steady supply conditions are the key drivers of this positive trend.

Despite global uncertainties and some localized concerns, the Indian economy appears to be in a disinflationary phase, helped by policy measures, favorable food production, and relatively soft global demand. The findings in the BoB report align with the broader market sentiment that inflation, particularly Consumer Price Index (CPI) based inflation, has become increasingly manageable.

BoB’s Findings: CPI to Undershoot RBI Forecast

According to the report:

“We expect CPI in Q1 to undershoot RBI’s 2.9% forecast as Jun’25 high-frequency price data is also comforting.”

The implication here is that inflationary pressures are easing faster than anticipated, a development welcomed by both policymakers and financial markets. The comforting June data, according to BoB, reflects a broader price stability, especially in key food items, which often play a dominant role in India’s inflation calculations.

Food Inflation: A Crucial Relief

The most notable area of relief has come from food inflation, particularly in vegetables, pulses, cereals, and protein-based foods. These categories showed measured price corrections, driven by both better crop outputs and effective supply chain management.

The report notes that:

• Tomato, Onion, and Potato (TOP) prices, while showing some gradual increase, are not alarming and remain under watch.

• Government interventions, including buffer stock releases, procurement efficiency, and targeted import/export controls, have significantly improved supply-side dynamics.

• The overall food inflation trajectory remains non-disruptive, which provides room for monetary policy flexibility in the coming months.

BoB credited the government's proactive policy stance in supply management for the softening inflation metrics. In particular, steps to boost rabi crop procurement, streamline logistics, and stabilize essential commodity markets have had a measurable impact.

Core Inflation Still Sticky

While the headline inflation seems to be easing, the report raised caution over core inflation, which excludes food and fuel and is a better indicator of underlying demand-side pressures.

Key observations include:

• Demand revival from both urban and rural sectors is pushing up service-related costs.

• The recent jumbo rate cut by the RBI and ample liquidity in the banking system have fueled consumer spending, especially in housing, transportation, and services.

• The increase in Minimum Support Prices (MSP) for kharif crops has added to rural purchasing power, indirectly contributing to price stickiness in non-food items.

This nuanced view highlights a mixed inflation scenario, where the headline number looks stable, but core inflation remains resistant to a sharp fall.

Global Commodities and External Volatility

The BoB report does not dismiss external risks, particularly from volatile global commodity markets. The ongoing geopolitical tensions, especially in West Asia and Eastern Europe, have kept crude oil prices unpredictable.

However, the report tempers this concern by noting:

• Global demand remains weak, as reflected in high-frequency indicators from China, Europe, and parts of Latin America.

• There’s no immediate risk of a global commodity super-cycle, which means imported inflation risks remain moderate.

• Exchange rate stability and strategic fuel reserves have helped buffer the impact of imported inflation in India.

Favorable Inflation Outlook Depends on Monsoon and Trade Dynamics

Another central assumption in the inflation forecast is the expected progression of the monsoon. The India Meteorological Department (IMD) has forecast a normal monsoon, which is critical for agricultural output and rural consumption. A healthy monsoon would reinforce the positive food inflation trajectory, while also ensuring steady demand and employment in the farm sector.

Additionally, BoB flagged the importance of clarity in global tariff policies, especially with the July 2025 deadline for certain US-imposed trade measures under review. The trade standoff between India and the US, particularly around pharmaceutical exports, steel, and data localization, could alter import/export cost structures if left unresolved.

RBI’s Role and Policy Flexibility

The RBI’s monetary policy stance, including its recent rate cut, will be a key determinant of the medium-term inflation path. While the recent easing was aimed at boosting growth, it does have inflationary implications, especially if liquidity remains abundant without proportionate absorption.

The RBI has indicated a data-dependent approach, and if food prices remain benign, it may have room for further calibrated easing later in FY26. However, it must balance this against the risk of core inflation persistence, which could potentially delay the central bank’s inflation target achievement.

Conclusion: Inflation Relief, But Caution Persists

The Bank of Baroda’s report provides a cautiously optimistic view of India’s inflation trajectory in Q1 FY26, projecting a headline CPI below RBI’s 2.9% target. This relief is primarily driven by easing food prices, stable supply chains, and government interventions.

However, the report rightly highlights the underlying stickiness in core inflation, driven by demand-side pressures, increased government spending, and MSP-induced rural demand.

If monsoon performance stays on track, and external shocks remain contained, India could see sustained low inflation for the remainder of the year. Nevertheless, policymakers must remain vigilant, particularly around volatile food prices, geopolitical uncertainties, and the impact of trade disputes on the inflation matrix.

In summary, India is in a strong position, but continued policy vigilance and fiscal prudence will be essential to keep inflation on a controlled trajectory through FY26.

The Upcoming IPOs in this week and coming weeks are HDB Financials, ArisInfra Solutions, Influx Healthtech, Mayasheel Ventures, Eppeltone Engineers, Patil Automation, Samay Projects Services.

The Current active IPO are Oswal Pumps, Aten Papers, Monolithisch India.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.