India's inflation edges up, but rate-cut bets stay alive

By Nikunj Ohri and Sarita Chaganti Singh

NEW DELHI (Reuters) - India's retail inflation accelerated to 2.07% in August as food prices inched higher over the previous month, but stayed well within the central bank's tolerance band, leaving room for another interest rate cut this year.

Annual retail inflation quickened from a revised 1.61% in July and was in line with a Reuters poll of 2.1%, data released on Friday showed. The Reserve Bank of India is mandated to not let inflation overshoot its tolerance range of 2%-6% for more than three quarters in a row.

The world's fifth-largest economy is expected to expand at a pace of 6.5% this financial year - the fastest among major economies. However, low inflation has weighed on corporate earnings and equity markets, with tariffs of up to 50% on Indian exports to the U.S. adding pressure.

With price rise in check, growth risks worsening and major central banks like the U.S. Federal Reserve set to cut interest rates, economists see room for further policy easing from the Reserve Bank of India this year.

The central bank's rate-setting panel will deliver its next decision on October 1.

"While we see a pause by the RBI in the upcoming policy, we do see some scope for rate cuts worth 25-50 basis points opening up from December policy if downside risks to growth materialise," Upasna Bhardwaj, economist at Kotak Mahindra Bank, said.

India's policy repo rate is currently at 5.5%.

The increase in headline and food inflation during August was mainly due to a rise in prices of vegetables, meat and fish, oil and fats, personal care and eggs between July and August, according to an official statement.

Food prices fell 0.69% in August from a year ago compared with a sharper decline of 1.76% in July while vegetable prices fell 15.92% after a decline of 20.69% in the previous month.

Above-normal rainfall in August, and an expectation of similar showers in September could damage India's summer-sown crops like rice, cotton, soybean and pulses and push their prices higher.

Core inflation, which excludes volatile items such as food and energy and is an indicator of demand in the economy, was at 4.1% in August compared with 4%-4.12% in July, according to three economists.

TAX RELIEF

New Delhi's tax cuts on food and hundreds of household and consumer items are expected to lower inflation in the coming months.

Inflation is expected to remain low for the remaining part of 2025, supported by lower food inflation and consumption tax rate cuts, Sakshi Gupta, economist at HDFC Bank, said.

"With even a 50-60% pass through of GST cuts, we see FY26 inflation moving down by 20-30 basis points compared to our current estimate of 2.8%," she said.

Weaker growth due to punitive tariffs imposed by the U.S. on Indian exports could also keep companies' pricing power in check.

"We think downside risks to growth would be increasingly evident with global resets and monetary easing led by the Fed, and could open up space for easing in the rest of the year," said Madhavi Arora, chief economist at Emkay Global Financial Services.

(Reporting by Sarita Chaganti Singh and Nikunj Ohri; Additional reporting by Manvi Pant and Hritam Mukherjee; Editing by Mrigank Dhaniwala)

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