Inflation has reported a broad-based decline over the past few months, falling from above the tolerance band in October 2024 to levels well below the apex bank’s target
Continuing its downward trajectory, headline consumer price index (CPI) inflation eased to 3.2 per cent year-on-year (YoY) in April 2025, the lowest level in nearly six years. Taking this into consideration, and assuming a normal monsoon, the Reserve Bank of India (RBI) has projected the CPI inflation for the financial year 2025-26 to print at 3.7 per cent, down from its earlier forecast of four per cent.
The 55th meeting of the Monetary Policy Committee (MPC) assessed the factors responsible for the fluctuations and stated that the CPI inflation is likely to be at 2.9 per cent for the first quarter of the current fiscal (Q1), 3.4 per cent for Q2, 3.9 per cent for Q3, and 4.4 per cent for Q4. The central bank added that the risks are evenly balanced.
Durable Alignment With RBI’s Target
With signs of a broad-based moderation, inflation has softened significantly over the last six months from above the tolerance band in October 2024 to well below the target. Sanjay Malhotra, the Governor of RBI noted that the near-term and medium-term outlook now gives the bank the confidence of not only a durable alignment of headline inflation with the target of four per cent, as exuded in the last meeting but also the belief that during the year, it is likely to undershoot the target at the margin.
“With inflation well within its comfort zone, the RBI has, on expected lines, cut the benchmark repo rate by 50 basis points to 5.50 per cent effective immediately. By lowering borrowing costs, the move is set to provide a big impetus to growth and lift investor sentiment. As mentioned during the monetary policy statement, uncertainties persist on the global front, posing downside risks to merchandise exports,” Pankaj Chadha, Chairman, Engineering Export Promotion Council of India (EEPC India).
Indication Of Continued Moderation
The fuel group witnessed a reversal of deflationary conditions and recorded positive inflation prints during March and April, partly reflecting the hike in liquefied petroleum gas (LPG) prices. Core inflation remained largely steady and contained during March-April, despite an increase in gold prices exerting upward pressure.
Highlighting that the outlook for inflation points towards benign prices across major constituents, the Governor emphasised that the record wheat production and higher production of key pulses in the Rabi crop season should ensure an adequate supply of key food items.
“Soft crude oil and commodity prices mean the risk of imported inflation is lower. Crude oil prices are expected to stay subdued around USD 65 per barrel this fiscal compared with USD 78.8 in the last fiscal. If the forecast of plentiful rains comes true this monsoon, the inflation gains will be durable. Healthy output and above-norm buffer stocks of foodgrains will also check prices,” highlighted Dharmakirti Joshi, Chief Economist, Crisil.
Monsoon Booster Dose
Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households, as per the RBI Governor. Most projections point towards continued moderation in the prices of key commodities, including crude oil.
“CPI inflation for FY26 has been revised downwards, projected at 3.7 per cent, supported by record wheat production, higher pulses production, and a likely above-normal monsoon. Going forward, India will continue to grow resiliently and robustly, supported by strong macroeconomic fundamentals and price, financial and political stability,” highlighted Hemant Jain, President, PHD Chamber of Commerce and Industry (PHDCCI).
However, Bank of Baroda expects inflation to be slightly higher in FY26 at 3.8 to 3.9 per cent, as it awaits more information on the spatial distribution of rainfall and remains cautious regarding the core inflation.
Steady Rural Demand
On the demand aspect, private consumption, the mainstay of aggregate demand, remains healthy, with a gradual rise in discretionary spending. The apex bank noted that rural demand remains steady, while urban demand is improving. The outlook for the agriculture sector and rural demand is expected to receive further impetus by the expected above-normal southwest monsoon rainfall.
“With inflation easing, borrowing costs are likely to fall further, boosting both credit and consumption. Retail investors should see this as an opportunity to realign toward equities and long-duration debt amid rising market optimism,” stated Kirang Gandhi, a Pune-based financial mentor.
On the other hand, the Governor mentioned that a sustained buoyancy in services activity should nurture revival in urban consumption. In FY26 so far, domestic economic activity has exhibited resilience. The agriculture sector remains strong, and with a very good harvest in both the kharif as well as rabi cropping seasons, the supply of major food crops is comfortable. The RBI noted that the reservoir levels remain healthy.
Households’ Inflation Expectations
Going by the results of the RBI’s May 2025 round of its bi-monthly inflation expectations survey of households (IESH), households’ median perception of current inflation declined further by 10 basis points (bps) to 7.7 per cent when compared to the March 2025 round of the survey. For both short-term and one-year ahead periods, the shares of respondents anticipating a rise in both general prices and inflation have come down vis-à-vis the previous survey round.
On the other hand, the Urban Consumer Confidence Survey of the RBI revealed that pessimism about the current price level and inflation continued to ease for the second consecutive round. Households also expect a decline in both price and inflationary pressures over the coming year
No Tussle Between Price Stability And Growth
Emphasising that strong macroeconomic fundamentals and a benign inflation outlook provide space for monetary policy to support growth, the Governor noted that there is no tussle between price stability and growth in the medium and long term.
The Governor highlighted that price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions and ensures congenial interest rates and financial conditions, all of which foster consumption, investment and overall activity. Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor, he noted.
Downside Risks
While the outlook for the current fiscal year appears bright, the apex bank has warned that we need to remain watchful of weather-related uncertainties and still evolving tariff-related concerns with their attendant impact on global commodity prices. Crisil’s Joshi also added that climate-related risks to agriculture, particularly for vegetables, which are more vulnerable, have become more frequent and will need close watch.
With the MPC voting to reduce the policy repo rate by 50 basis points (bps) to 5.50 per cent with immediate effect, the change of stance to ‘neutral’ from ‘accommodative’ signals that there remains limited room for future rate cuts. Unless the two forecasts on inflation and the gross domestic product (GDP) change significantly, the case for revision in the apex bank’s policy stance is not a likely expectation in its August MPC meet.
