RBI Cuts FY26 Inflation Forecast to 3.1% as Food Prices Cool Down

Market Performance

The Reserve Bank of India's latest policy decision has brought positive news for the Indian economy. RBI cuts FY26 inflation projections significantly, reflecting improved economic conditions.

Retail inflation has reached a remarkable 77-month low of 2.1% in June 2024. The June reading shows a notable decline compared to May's 2.8% inflation rate.

Main News

The Monetary Policy Committee (MPC) made a crucial decision on August 6, 2024. RBI cuts FY26 inflation forecast from 3.7% to 3.1%, marking a significant 0.6 percentage point reduction.

Governor Sanjay Malhotra highlighted the key drivers behind this revision. Food prices, particularly vegetables, have shown considerable volatility leading to lower overall inflation.

The central bank maintained its policy rates unchanged during the bi-monthly review. This decision aligned with market expectations and the neutral monetary policy stance.

Quarterly Inflation Projections

The RBI cuts FY26 inflation forecasts across multiple quarters show a comprehensive revision:

Second Quarter FY25

• Revised down to 2.1% from earlier 3.7%
• Represents a massive 1.6 percentage point cut

Third Quarter FY25

• Lowered to 3.1% from previous 3.9%
• Shows 0.8 percentage point reduction

Fourth Quarter FY25

• Maintained at 4.4%
• No change from earlier projections

First Quarter FY27

• Projected at 4.9%
• Expected to rise above RBI's 4% target

Policy Rate Decisions

Under Governor Malhotra's leadership since December 2024, monetary policy has been accommodative. The RBI has reduced policy rates by 100 basis points throughout the year.

The current repo rate stands at 5.5%. This represents the cumulative impact of rate cuts implemented in 2024.

17 economists and financial experts participated in a Moneycontrol survey. Their consensus correctly predicted the rate pause and inflation forecast revision.

Economic Outlook and Risks

RBI cuts FY26 inflation projections come with certain caveats about future trends. Core inflation is expected to remain moderately above 4% during FY26.

Weather-related disruptions pose ongoing risks to the inflation trajectory. These factors could potentially impact food prices and overall price stability.

The fourth quarter of FY26 may see inflation crossing the 4% medium-term target. Unfavorable base effects and demand-side pressures from policy actions contribute to this expectation.

Summary

The RBI cuts FY26 inflation forecast represents a significant positive development for India's economic outlook. The reduction from 3.7% to 3.1% reflects improving price stability conditions.

Food price moderation, particularly in vegetables, has been the primary driver. The 77-month low inflation rate of 2.1% in June demonstrates the effectiveness of current monetary policies.

While maintaining policy rates unchanged, the RBI shows confidence in the inflation trajectory. The revised quarterly projections provide a clearer roadmap for price expectations through FY26.