Prices may cool down soon as tax cuts take effect; Inflation expected at 3.1% in FY26: BoB report

Prices of everyday goods and services could start to come down in the coming days, as recent cuts in indirect taxes by the government begin to show their effect, according to a report by Bank of Baroda (BoB). The report added that overall inflation (CPI) will likely settle at around 3.1 per cent in the financial year 2025-26, with a good chance it could go even lower."We may see episodes of disinflation in the coming days as government support through lower indirect tax rates is likely to be passed on to actual numbers sooner, if not later. We expect CPI in FY26 to settle at 3.1 per cent, with risks tilted to the downside," the report added. Consumer inflation saw some relief in August 2025, mainly driven by a continued drop in food prices. CPI inflation reading came in at 2.1 per cent in Aug'25, on a YoY basis, compared to 3.7 per cent inflation seen in Aug'24.The food price index stayed in deflation for the third month in a row, indicating that the disinflation trend is gaining strength. Much of the comfort came from the lower prices of vegetables and pulses.The fine prints show that food index remained in deflation territory for 3 consecutive months in a row, falling by -0.7 per cent in Aug'25 compared to 5.7 per cent in Aug'24. The sequential picture of food inflation also shows loss of momentum for food inflation. The major softening is seen for vegetables, fruits, meat and fish and eggs. Even oilseeds whose prices used to be sticky due to higher international price has also moderated a tad. However, its domestic price needs to be monitored as sowing has moderated. On a seasonally adjusted basis, consumer food price index rose by 0.8 per cent, MoM, in Aug'25Bank of Baroda's in-house Economic Condition Index (BoB ECI) is at -0.9 per cent for the first 10 days of September 2025, signaling further softening in prices. Even weather-related disruptions have not affected the supply of key vegetables like tomatoes, onions, and potatoes (TOP), the report added.Meanwhile, core inflation has remained stable, and core inflation excluding gold continues to stay low, the report added.