Mumbai: The Reserve Bank of India (RBI) has reduced its inflation projection for FY26 to 4 per cent, down from 4.2 per cent. This downward revision is attributed to favorable agricultural output and falling crude oil prices. These factors have significantly improved the inflation outlook for the upcoming fiscal year.
Decline in CPI and Food Inflation
Retail inflation, measured by the Consumer Price Index (CPI), dropped by 1.6 percentage points from January to February 2025. CPI inflation decreased from 5.2 per cent in December 2024 to 3.6 per cent in February 2025. Food inflation, especially, showed a notable decline, driven by seasonal corrections in vegetable prices. In February, food inflation dropped to its lowest in 21 months, reaching 3.8 per cent.
RBI's Positive Outlook on Food Inflation
RBI Governor Sanjay Malhotra emphasized the significant reduction in vegetable prices, noting that food inflation is now on a more "decisively positive" path. With strong crop production expected, the RBI anticipates further softening in food inflation, which will contribute to the overall reduction in inflation for FY26.
Monetary Policy Adjustments & Repo Rate Cut
In an effort to control inflation, the RBI also announced a cut in the repo rate. The repo rate, which is the interest rate at which the central bank lends to commercial banks, influences borrowing costs across the economy. By lowering the repo rate, the RBI aims to reduce the cost of loans and ease the burden of monthly EMIs for consumers. This is a welcome move for borrowers, as reduced interest rates will make loans more affordable.
Positive Agricultural Outlook
The RBI highlighted that concerns about the rabi crop have eased, with the latest estimates showing record wheat production and increased output of key pulses. Along with strong kharif crop arrivals, these factors are expected to continue softening food inflation and support the inflation forecast for FY26.
Risks and Future Outlook
Despite the positive outlook, the RBI remains cautious about global market uncertainties and potential weather disruptions that could impact supply chains. However, assuming a normal monsoon, the RBI projects CPI inflation to average 4 per cent in FY26, with quarterly projections ranging from 3.6 per cent in Q1 to 4.4 per cent in Q4.
