The Reserve Bank of India (RBI) on Wednesday lowered its inflation projection for FY26 to 4 per cent from 4.2 per cent estimated in February, taking into account good agricultural output and falling crude prices. The RBI’s Monetary Policy Committee (MPC) reviewed the economy’s performance in its policy meeting and flagged a sharp turnaround in food inflation trends as a key driver behind the improvement.
RBI Governor Sanjay Malhotra said, “Headline inflation moderated during January-February 2025 following a sharp correction in food inflation. The outlook for food inflation has turned decisively positive. The uncertainties regarding rabi crops have abated considerably and the second advance estimates point to a record wheat production and higher production of key pulses over that last year. Along with robust kharif arrivals, this is expected to set the stage for a durable softening of food inflation.” Going forward, he added, a sharp decline in inflation expectations in the latest survey for three months and one year ahead would also help anchor inflation expectations. Furthermore, the fall in crude oil prices augurs well for the inflation outlook.
Taking all these factors into consideration, and assuming a normal monsoon, the central bank projected FY26 CPI inflation at 4.0 per cent, with Q1 at 3.6 per cent, Q2 at 3.9 per cent, Q3 at 3.8 per cent, and Q4 at 4.4 per cent. The risks are evenly balanced.
Inflation trajectory opens room for deeper rate cut cycle
Economists said that the outlook on inflation will provide room for a deeper rate cut cycle. Suvodeep Rakshit, Chief Economist, Kotak Institutional Equities, said, “The benign outlook on inflation (favorable monsoon, lower crude oil prices to offset INR depreciation) and downside risks to growth will provide room for this deeper rate cut cycle. The RBI’s focus remains on addressing growth concerns as inflation is expected to remain around the 4 per cent handle.”
Parijat Agrawal, Head of Fixed Income, Union Asset Management Company Private Limited, said, “The inflation forecast for this fiscal year has been adjusted to align with the Reserve Bank of India’s target of 4 per cent which is positive development, which allows for additional room for further rate reductions.”
The central bank announced a 25 bps cut in the key interest rate. Dr Manoranjan Sharma, Chief Economist, Infomerics Valuation and Ratings Ltd, said, “Easing inflation, the manifest need to shore up economic growth and the evolving growth inflation trade-off necessitated 25 bps in the repo rate to 6 per cent on top of the 25 bps cut in February 2025.” Informerics predicted a repo rate reduction of 75-100 bps in FY26. “Given the evolving macroeconomic growth and inflation trajectories, the growth and inflation projections were tempered as anticipated by us,” he added.
Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities, said, “The Consumer Price Inflation (CPI) fell to one of its lowest levels in six years to 3.6 per cent. Since the inflation is well within RBI’s comfort level they decided to go ahead with rate cut to support growth which hit a six quarter low in September 2024 of 5.6 per cent.”
Ajit Mishra, SVP, Research, Religare Broking Ltd, said, “This decision comes on the back of a sustained moderation in retail inflation. In February 2025, the Consumer Price Index (CPI) fell to 3.61 per cent, well within the central bank’s target band of 4 per cent ± 2 per cent. The drop in inflation has created the necessary space for monetary easing, with the latest rate cut expected to reduce borrowing costs for both households and businesses, thereby aiding credit growth and demand revival.”
Indranil Pan, Chief Economist at Yes Bank, said, “Both inflation and growth forecasts were lowered by 20 bps. The space for policy rate cuts were predicated by a decisive change in the inflation outlook, led by food prices and more specifically vegetable prices. Given projections by Skymet of a normal monsoon, the risks to food inflation are likely reduced. At the other end of the spectrum, global growth risks have unleashed a sharp softening in crude oil and other commodity prices, and this is also a positive for India’s inflation dynamics. Overall, the confidence that inflation would remain aligned to the 4 per cent target has magnified. Given a 4 per cent inflation target, the scope of pushing the repo rate down to 5.50 per cent in this cycle has opened. Consequently, we expect the RBI to cut in June and also in August.”
Furthermore, the RBI governor flagged key risks to inflation trajectory. “Concerns on lingering global market uncertainties and recurrence of adverse weather-related supply disruptions, however, pose upside risks to the inflation trajectory,” the RBI governor said.
The next MPC meeting is scheduled for June 4–6, followed by subsequent meetings on August 5–7, September 29–October 1, December 3–5, and February 4–6.