RBI has reduced inflation forecast for FY26, FY25 forecast remains unchanged

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In its latest Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) has projected retail inflation for the next financial year starting April to be at 4.2 percent, while maintaining the forecast for the current year, 2024-25, at 4.8 percent.

While growth is anticipated to rebound from the low recorded in Q2 FY25, it remains significantly below last year's 8.2 percent growth rate, influenced by excessive volatility in global financial markets, uncertainties in global trade policies, and weather-related events, which together cast shadows over both growth and inflation outlooks, said the RBI Governor, Sanjay Malhotra.

This scenario mandates "vigilance from the MPC to navigate the macroeconomic environment effectively, providing them with the flexibility to adjust policies as needed," he added.

Malhotra highlighted that while the rural economy shows signs of healthy growth, urban consumption has seen moderation. Despite a downward revision in GDP growth forecasts, the governor said that improving employment, the positive impact of the union budget, and moderating inflation will stimulate fixed investment.

He noted that, currently, inflation stands at 5.2 percent. "Looking forward, there are signs that food inflation and supply-side shocks will soften, particularly with the annual winter easing that typically brings down vegetable prices. The prospects for the Rabi crop also look promising, which could further aid in controlling food inflation."

However, core inflation is expected to see an uptick, driven by continuing volatility in energy prices and potential weather disruptions. For the current financial year, the CPI inflation is projected to be 4.8 percent, with the current quarter's inflation forecasted at around 4.4 percent.

"Going ahead, food inflation pressures, absent any supply side shocks, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects. Core inflation is expected to rise but remain moderate," the RBI Governor stated.

Inflation hit an upper limit of 6.2 per cent in October 2024 but eased in November and December that year owing to a fall in vegetable prices, the central bank noted in its first monetary policy committee (MPC) meeting this year. The fourth quarter inflation for the current financial year is pegged at 4.4 per cent.

However, the central bank advised caution against rising uncertainty in global financial markets "coupled with continuing volatility in energy prices and adverse weather events" that could present upside risks to the inflation trajectory.