The CPI inflation eased further to 1.6% in July, primarily driven by the deepening of deflation in the food category. The core inflation also eased to 4.1% down from 4.4% last month and continues to remain at comfortable levels. The fall in core inflation was largely due to the sharp moderation of inflationary pressures in transport, communication, and education. However, high double-digit inflation in precious metals continued. In the food basket, there was deflation in key items such as vegetables, pulses, spices, and meat. Looking ahead, food inflation is likely to remain contained, supported by healthy agricultural activity and a favorable base. Good progress of monsoon, adequate reservoir levels, and strong kharif sowing bode well for agricultural output and food price stability. Close monitoring of the monsoon’s spatial and temporal distribution will remain crucial. On the external front, while global commodity prices are broadly expected to remain stable, intermittent spikes cannot be ruled out amid ongoing geopolitical tensions. Crude oil prices, which had surged due to unrest in the Middle East, have since corrected. However, concerns over potential US secondary sanctions on Russian crude could disrupt supply chains for major importers such as India and China. Although OPEC has spare capacity, global oil dynamics could shift and will need close monitoring. With food inflation remaining subdued and demand-side pressures contained, we project average CPI inflation at 3.1% for FY26. The RBI maintained policy rates in its August meeting, following a front-loaded rate cut in July. However, we expect inflationary momentum to rise in the second half of the fiscal year as the favorable base effect wanes. Q4 FY26 inflation is projected to average well above 4%, and for FY27, we expect it to average above 4.5%. Accordingly, we do not anticipate further rate cuts unless economic growth weakens significantly.