As August inflation is expected to exceed 2% and approach 2.3 percent, a rate cut by the Reserve Bank of India (RBI) in October appears unlikely, according to SBI Research, and a rate cut in December appears even more difficult if growth numbers for Q1 and Q2 are considered.
India's CPI inflation fell to a 98-month low of 1.55 percent in July, down from 2.10 percent in June and 3.60 percent in July 2024.
Key Highlights
- SBI warns that rising inflation and growth factors likely rule out further RBI rate cuts in 2025.
- India’s retail inflation eased to a 98-month low of 1.55% in July, thanks to falling food prices.
The July reading marks the ninth consecutive month of decline, owing primarily to the decline in food inflation, which is also at a 78-month low. Food inflation fell by 75 basis points in July compared to June 2025. Food inflation in July 2025 is the lowest, at -1.76 percent, since January 2019, when it was -2.24 percent.
Core inflation also decelerated sharply, falling below 4% for the first time in six months. Excluding gold prices, core inflation fell below 3% to 2.96 percent in July 2025, nearly 100 basis points lower than headline core CPI, according to the report.
Furthermore, India Inc, which includes approximately 2,500 publicly traded entities, reported top-line growth of 5.4% in Q1 FY26, while EBIDTA increased by approximately 6%.
"In the second quarter, we may see revenue and margin pressure in export-oriented tariff-affected sectors such as textiles, gems and jewellery, leathers, chemicals, agriculture, auto components, etc. The overall US CPI inflation (not seasonally adjusted) increased by 2.7% year on year in July, which is 40 basis points higher than the reading in April, indicating the negative impact of tariffs, according to the SBI report.
Since the RBI MPC decided to cut rates in June and then maintain the status quo in August, the 10-year yield has begun to rise. From hovering around 6.30 percent in July, it has now surpassed 6.45 percent. Bond yields may not become moderate until tariffs are clarified.
In this context, we want to reiterate that the yield curve is a public good. According to the report, debt market players in India frequently behave differently.
Also Read: RBI MPC Holds Repo Rate at 5.5%, Maintains Neutral Stance
For example, if one set of players acts pro-cyclically in response to the RBI's monetary policy stance, the other set of players acts counter-cyclically, and sometimes both players act combatively.
"However, following the announcement of the June policy, nearly all market participants are selling/behaving in the same way. This is surprising and results in a skewed price discovery despite headline inflation being at an 8-year low," according to the report.
