India’s retail inflation is projected to settle at 3.1 per cent in FY26, driven by falling food prices and the effects of recent GST rate reductions, a report has projected. The Indian economy may see episodes of disinflation in the coming days as government support through lower indirect tax rates is likely to be passed on to customers, according to the report from Bank of Baroda (BoB).

CPI inflation increased to 2.07 per cent in August, up from 1.61 per cent in July, remaining significantly lower than the 3.7 per cent reported a year ago. Food prices continued to decline for the third consecutive month, decreasing 0.7 per cent year-on-year, primarily due to lower costs for vegetables, pulses, and spices. Improved sowing and better arrivals of rice and pulses, along with favourable supply dynamics, are expected to maintain subdued food inflation.

Looking forward, the bank said that headline CPI is getting the desired comfort from benign food inflation. In the coming days as well, improved sowing especially for rice and pulses, above normal monsoon, comfortable reservoir level will remain supportive of a further lower food inflation print.

Apart from this, the transition of the majority of food and beverage and core inflation items to the lower GST bracket is likely to further bring down inflation, the report noted. Food inflation has started to move up from very low levels, with a statistical low-base effect also coming into play, the report said. Food deflation eased to -0.7 per cent in August, improving from -1.8 per cent in July.

Fuel and light inflation readings came in at 2.4 per cent on a YoY basis, and some sequential pickup was witnessed due to kerosene prices showing some pickup. Earlier, according to a report by SBI Research, a rate cut in October is unlikely because the August inflation print is slightly higher than the 2 per cent mark. If growth numbers for Q1 and estimated Q2 data are taken into account, even a rate cut in December appears to be a little challenging.