In a promising update for India’s economy, the Reserve Bank of India (RBI) has projected the Consumer Price Index (CPI) inflation at 3.1% for the financial year 2025-26. This optimistic outlook comes on the back of a steady monsoon season and robust kharif sowing, which are expected to stabilize food prices.
RBI Governor Sanjay Malhotra highlighted the factors contributing to this favorable forecast. “The inflation outlook for 2025-26 has become more benign than expected in June,” he said. He credited large favorable base effects, the steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels, and comfortable buffer stocks of foodgrains for this moderation.
However, the RBI also cautioned that CPI inflation could rise above 4% by the fourth quarter of FY26. This potential uptick is attributed to unfavorable base effects and demand-side factors stemming from policy actions. Core inflation, excluding any major shocks to input prices, is expected to hover moderately above 4% throughout the year.
Weather-related shocks remain a wild card in this forecast. Despite these risks, the RBI has maintained its projection for CPI inflation at 3.1% for FY26, with quarterly estimates of 2.1% in Q2, 3.1% in Q3, and 4.4% in Q4. The first quarter of FY27 is projected at 4.9%, with risks evenly balanced.
The recent decline in CPI headline inflation to a 77-month low of 2.1% in June 2025 has been a silver lining. This marks the eighth consecutive month of decline, driven largely by a sharp drop in food inflation. Improved agricultural activity and supply-side measures played a key role, with food inflation even turning negative (-0.2%) for the first time since February 2019.
High-frequency price indicators suggest this downward trend in food prices continued into July. Meanwhile, core inflation, which had remained stable between 4.1-4.2% from February to May, edged up to 4.4% in June, partly due to rising gold prices.
With these projections, the RBI aims to balance optimism with caution, keeping a close watch on external and domestic factors that could influence inflation. The monsoon’s performance and agricultural output will remain critical in maintaining price stability.