India markets: Benign inflation reinforces RBI pause
RBI pause backed by CPI inflation.
Group Research - Econs, Radhika Rao13 Aug 2026
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July’s inflation release validated the RBI monetary policy committee’s decision to keep rates on hold this month. July inflation rose 4.4% yoy (DBSf: 4.4%) unchanged from June. Normalisation in the heavyweight food segments continued, driven by a mix of perishables, cereals, edible oils and pulses. Sowing activity has picked up into August, helped by a narrower cumulative rainfall gap between June to August, although acreage under coarse cereals and rice remains below trend. Energy and transport inflation edged up to 4.6% y/y in July from 4.5% previously, reflecting the pass-through of earlier fuel price increases. Despite Brent crude prices remaining above year-ago levels on a year-to-date basis, we do not anticipate a further increase in domestic pump prices. Core inflation was steady from month before at 3.9% yoy, with core-core (ex-precious metals) more subdued at sub-3% levels, pointing to limited spillover from the West Asia crisis. Underlying momentum, gauged by 3M/3M saar %, nonetheless points to a gradual lift in the price readings. Policymakers will be watchful of El Nino developments, especially as monsoon is currently ~12% below normal and sowing ~2% below trend. 

Benign core measures and absence of generalised pickup in price pressures support our baseline call for the central bank to stay on hold at the next review. Markets-based implied rates are also likely to soften as a result. Separately, comparison of the RBI’s quarterly inflation profile and the prevailing policy rate has brought the real rate debate back into focus. Official inflation projections imply inflation of around 5.3-5.5% over the year ahead, compared with a repo rate of 5.25%, implying a near-zero real policy rate buffer. This stands in contrast to earlier policy regimes where policymakers often referred to a positive real rate cushion of roughly 1.0-1.5 ppt. While the MPC did not explicitly emphasise this issue, a narrowing real policy rate cushion could become increasingly relevant if growth remains resilient and inflation inches up. Onshore markets have been ambivalent to volatile moves in global oil benchmarks in recent weeks, while 10Y bond yield hovers within 6.75-6.85% (see note).  


Radhika Rao

Senior Economist – Eurozone, India, Indonesia
radhikarao@dbs.com



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