The RBI Might Considerably Reduce the Inflation Forecast for FY26
The Reserve Bank of India (RBI) is likely to revise its inflation forecast for FY26 downward from the previously estimated 4%, primarily due to decreasing food prices, robust agricultural yields, and a decline in crude oil rates. In April, the Consumer Price Index (CPI) recorded an inflation rate of just 3.16%, marking its lowest level in several months. The Monetary Policy Committee (MPC) is also expected to announce a reduction of the repo rate in its policy meeting scheduled for June, amidst an improving outlook on disinflation.
Sources indicate that as the MPC convenes from June 4-6, a further cut of 25 basis points (bps) in the policy repo rate is anticipated. The recent CPI inflation figure for April was surprisingly low at 3.16%. This, coupled with the expectation that food prices will remain subdued in the upcoming months due to strong supply, is likely to lead to a significant downward adjustment in the inflation forecast for the current fiscal year. Additionally, the recent drop in crude oil prices has bolstered the disinflationary trajectory.
In its 54th meeting held in April, the MPC reached a unanimous decision to lower the policy rate by 25 bps, bringing it down to 6%. This marks the second consecutive cut, totaling a 50 bps reduction in the current monetary easing cycle. Analysts largely expect the RBI-MPC to implement two more rate cuts during this fiscal year, with some foreseeing successive reductions in the upcoming reviews.
During the last meeting, the MPC projected CPI inflation for the fiscal year at 4%, with quarterly estimates suggesting 3.6% for Q1, 3.9% for Q2, 3.8% for Q3, and 4.4% for Q4. It is likely that the Q1 forecast will experience a significant downward adjustment, especially as winter crop arrivals are promising to be strong and kharif arrivals are nearing completion. The weather department’s forecast of above-normal monsoon conditions following the last MPC meeting could further support expectations of low food prices over an extended period. In April, the RBI initially based its inflation projections on an assumption of a normal monsoon, with risks viewed as evenly balanced at that time. However, global uncertainties and ongoing tariff tensions could pose upside risks to inflation estimates.
The “Food and Beverages” category holds a significant weight of 45.86% in the CPI. Retail food inflation decreased for the sixth consecutive month to 1.78% in April, down from 2.69% in March, driven by lower prices for vegetables, pulses, meat, fish, and spices due to recent winter harvests. The Consumer Food Price Index (CFPI) saw a sequential decline of 0.153% from March to April. In April of the previous year, food inflation was as high as 8.7%, indicating a notable shift.
The April 2025 food inflation rate is at its lowest since October 2021, when it was recorded at 0.85%. “The decline in food inflation is primarily attributed to falling vegetable prices, and it’s anticipated that inflation will remain low in May and June as well due to base effects,” stated Madan Sabnavis, Chief Economist at Bank of Baroda. Conversely, core inflation, which excludes volatile categories such as food and energy, has risen from December 2024 (3.61%) to April 2025 (4.21%), reflecting the lagging impact of prolonged high food inflation on various other consumption items. Core inflation is viewed as a more accurate measure of domestic demand, making it more responsive to monetary policy.
