RBI May Lower FY26 Inflation Forecast as Retail Prices Cool Sharply

India’s consumer price inflation (CPI) eased sharply to 2.1% in June—its lowest point in 78 months—largely due to a continued decline in vegetable and food prices. This drop brought Q1 FY26 average inflation to 2.7%, falling 20 basis points short of the Reserve Bank of India’s (RBI) earlier estimate of 2.9%.

This consistent moderation indicates a broader disinflationary trend, not just a temporary dip. According to an article by Moneycontrol, the RBI is now expected to take a fresh look at its full-year inflation estimates in light of this evolving price landscape.

RBI Faces Soft Data, but Core Inflation Remains Sticky

While headline inflation cooled significantly, core inflation rose to 4.3%. This increase is being linked to a negative base effect and rising gold prices. Though core inflation tends to be more stable, the RBI is likely to focus on the broader CPI trend when reviewing its policy stance.

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Forecast Revisions on the Horizon

As per Moneycontrol, market experts anticipate a notable downward revision in the RBI’s full-year CPI forecast. Emkay Global expects that the central bank may reset its FY26 CPI forecasts heavily downward in its upcoming August meeting. The brokerage projects FY26 inflation at just 2.9%.

Nomura has also revised its expectations, trimming its inflation estimate from 3.3% to 2.8%—well below the RBI’s official projection of 3.7%. The Japanese brokerage has also highlighted potential downside risks to the RBI’s FY26 GDP growth forecast of 6.5%.

Policy Direction to Remain Measured, Not Aggressive

In its previous Monetary Policy Committee (MPC) meeting, the RBI surprised markets by cutting the key policy rate by 50 basis points and announcing a phased 100-basis-point reduction in the cash reserve ratio (CRR) to support liquidity.

Despite the disinflationary trend, most economists believe the central bank will move cautiously. Madhavi Arora of Emkay Global pointed out that with CPI at 2.9% and the repo rate unchanged at 5.5%, the real interest rate stands at 2.6%—much higher than the estimated neutral rate of 1.65%—suggesting tightening financial conditions that may weigh on growth.

Nomura added, “While the hurdle for a rate cut at the next meeting in August appears high, we expect 25 bps cuts in each of the October and December meetings to take the terminal rate to 5.00%.”

Outlook for the Months Ahead

While the falling inflation trajectory strengthens the case for a more accommodative stance, the RBI is unlikely to rush into further cuts without weighing potential upside risks. Global uncertainties, sticky core inflation, and the need to support domestic demand could prompt the central bank to maintain a balanced, data-driven approach.

International brokerages such as Bank of America Securities and Morgan Stanley concur that inflation risks in the near term appear limited, but expect the RBI to act conservatively, fine-tuning its approach as clearer signals emerge from macroeconomic indicators.

Source: Moneycontrol