Central bank expects CPI inflation to peak at 5.9 per cent in Q3 FY27; GDP growth forecast raised to 6.7 per cent
The Reserve Bank of India (RBI) on Wednesday lowered its FY27 Consumer Price Index (CPI) inflation forecast to 5 per cent from 5.1 per cent, citing lower-than-expected inflation in the first quarter and limited pass-through of cost pressures. The central bank, however, expects inflation to rise through the year, with CPI inflation projected at 4.7 per cent in the second quarter of FY27, 5.9 per cent in the third quarter and 5.5 per cent in the fourth quarter. It has forecast inflation at 5.3 per cent for the first quarter of FY28.
The RBI said headline inflation is expected to rise in the near term and peak in the third quarter, largely due to food and fuel prices, before moderating thereafter.
The inflation outlook comes with risks from food prices, volatile crude oil markets, El Niño conditions and geopolitical uncertainties. The central bank said underlying inflationary pressures remain contained, while continuing to monitor whether supply-side price pressures feed into broader inflation.
Food And Fuel Drive Near-Term Inflation Outlook
Retail inflation rose to 4.4 per cent in June after remaining below the inflation target for sixteen consecutive months. The RBI said the recent increase in headline inflation has been driven primarily by food and fuel prices, while core inflation excluding precious metals remains benign.
The central bank has identified an uneven south-west monsoon and El Niño conditions as risks to the food inflation outlook. Global crude oil prices and geopolitical developments remain additional sources of uncertainty. The RBI said future policy action would depend on whether supply-side price pressures remain temporary or begin generating broader, second-round inflation effects.
Madhavi Arora, Chief Economist at Emkay Global Financial Services, described the overall policy tone as “cautious albeit constructive”. According to Arora, the RBI has balanced resilient domestic growth against uncertainties arising from the Middle East conflict, tighter global financial conditions and El Niño risks.
She noted that despite first-quarter inflation undershooting the RBI’s own projections, the MPC continues to emphasise weather-related risks and has reiterated that any near-term inflationary pressures are expected to remain largely supply-driven unless they begin feeding into broader, second-round inflation effects requiring monetary intervention.
FY27 Growth Forecast Raised To 6.7%
Alongside the lower inflation projection, the RBI raised its FY27 real GDP growth forecast to 6.7 per cent from 6.6 per cent earlier. The central bank expects GDP growth at 7 per cent in the first quarter of FY27, 6.4 per cent in the second quarter, 6.5 per cent in the third quarter and 6.8 per cent in the fourth quarter. It has projected 7.3 per cent growth for the first quarter of FY28.
The RBI said domestic demand, investment activity and high-frequency economic indicators continue to support economic activity. Private consumption, services exports and infrastructure spending are also expected to remain supportive. The central bank said strong capacity utilisation, resilient credit growth and sustained momentum in services exports should support economic activity through the remainder of the financial year.
However, it said geopolitical conflicts, volatile energy prices and an uneven south-west monsoon under El Niño conditions pose risks to agriculture and rural demand.
“As widely expected, the MPC unanimously decided to hold the repo rate unchanged at 5.25 per cent and retain the neutral stance. The slight surprise element was the upward revision in GDP growth for FY27 to 6.7 per cent from 6.6 per cent earlier and the downward revision in CPI inflation for FY27 to 5.0 per cent from 5.1 per cent earlier. Overall, the policy is optimistic about the emerging growth-inflation dynamics even amidst what the Governor called ‘persistent global uncertainty’,” said V K Vijayakumar, Chief Investment Strategist, Geojit Investments.
He added that the Governor’s rationale for maintaining rates was the resilience of the Indian economy alongside benign core inflation, noting that the policy outcome should be positive for equity markets while bond yields are likely to remain stable.
The six-member Monetary Policy Committee unanimously decided to keep the benchmark repo rate unchanged at 5.25 per cent for the second consecutive policy review and retained its neutral policy stance. The Standing Deposit Facility rate remains at 5.00 per cent, while the Marginal Standing Facility rate and the Bank Rate remain at 5.50 per cent. The RBI said its policy decisions would remain data-dependent, with inflation dynamics, weather conditions, global energy prices and geopolitical developments among the factors being monitored.
Food, Monsoon And Crude Remain Key Variables
The RBI’s inflation projections place food and fuel prices at the centre of the near-term price outlook, with the central bank expecting headline inflation to peak at 5.9 per cent in Q3 FY27. The monsoon will remain an important variable for food prices and agricultural activity. The RBI said climate-resilient crops, water conservation measures and continued infrastructure investment could help cushion some of the risks to agriculture and rural demand.
Crude oil remains another source of uncertainty. The central bank has flagged global energy price volatility alongside geopolitical tensions, which could influence domestic inflation through fuel and other cost channels.
“The RBI’s decision to maintain the repo rate at 5.25 per cent while retaining a neutral policy stance reflects a balanced and forward-looking approach to monetary policy. Although domestic macroeconomic fundamentals remain resilient and inflationary pressures are relatively contained, persistent global uncertainties, commodity price volatility and geopolitical risks warrant a cautious stance.” Ajit Mishra, Senior Vice President – Research, Religare Broking, said.
