NEW DELHI: India's retail inflation could average around 2.5% over the next six months, below the Reserve Bank of India 's (RBI) 3.5% target, HSBC Global Research said in a report on Friday.

This inflation decline will be driven by a high base effect, strong cereal production, weak commodity prices, and sufficient rainfall.

"We think that the low inflation print can be attributed to the high base of last year. Vegetable prices in the first 10 days of June have risen in the range of 0-13%. We think inflation is likely to average around 2.5% for the next six months, lower than the RBI's forecast of 3.5%," according to HSBC Global Research.

Retail inflation dropped to a 75-month low in May as food prices fell sharply. CPI inflation fell to 2.8% year-on-year, compared to 3.2% in April, as per data released by the National Statistics Office (NSO).

It is the lowest year-on-year inflation after February 2019 and is the fourth consecutive month when it has stayed below the RBI's target.

The lower-than-expected figure was mainly due to a continued drop in food prices. Sequential momentum remained flat, with a rise of just 0.1% following no change in April.

Food inflation remained in deflation for the fifth straight month, down 0.2% month-on-month, as vegetable, pulses, and spice prices continued to decline. Other items such as fruits, eggs, fish, meat, and sugar saw only mild increases, while milk and edible oil prices rose slightly due to revised rates by producers.

HSBC further noted that while gold prices are keeping core inflation elevated, rising over 30% year-on-year, excluding gold, core inflation came in at 3.5%.