Backed by consumption demand, the domestic economic activity is on a recovery path, allowing top bank to redirect its focus
Led by second advance estimates pointing to an increase in wheat production and higher production of key pulses and with uncertainties regarding rabi crops abating considerably, the outlook for food inflation has turned decisively positive. Assuming a normal monsoon, the Reserve Bank of India (RBI) has projected the consumer price index (CPI) inflation for the financial year 2025-26 at four per cent.
With urban consumption gradually picking up with an uptick in discretionary spending, bright prospects of the agriculture sector bode well for rural demand, which continues to be healthy. The apex bank has gone ahead with another rate cut of 25 basis points (bps) in its latest monetary policy committee (MPC) meeting.
With risks evenly balanced, the CPI Inflation for FY26 is projected at four per cent, with Q1 at 3.6 per cent; Q2 at 3.9 per cent; Q3 at 3.8 per cent; and Q4 at 4.4 per cent. The apex bank’s governor stated that the risks are evenly balanced.
Durable Softening Of Inflation
After breaching the upper tolerance band briefly in October 2024, headline inflation has since eased on the back of declining food inflation up to February 2025. Headline CPI inflation, which averaged 4.6 per cent during the first half of 2024-25, increased to 6.2 per cent in October 2024 but has since been easing with February 2025 inflation print at a seven-month low of 3.6 per cent, driven by a sharp decline in vegetable prices inflation.
“Headline inflation moderated during January- February 2025 following a sharp correction in food inflation. Along with robust kharif arrivals, this is expected to set the stage for a durable softening of food inflation. Furthermore, the fall in crude oil prices augurs well for the inflation outlook,” Sanjay Malhotra, the Governor of RBI, highlighted in his statement.
However, the Governor also added that concerns on lingering global market uncertainties and recurrence of adverse weather-related supply disruptions, however, pose upside risks to the inflation trajectory.
“The repo rate cut of 25 basis points is in line with current market conditions as the headline inflation in February was within the RBI’s tolerance limit due to a sharp decline in food prices. This reduction in the repo rate is expected to catalyse domestic consumption, boosting the gross domestic product (GDP) growth,” stated Shrinivas Rao, Frics, Chief Executive Officer (CEO), Vestian.
Bright Prospects For Food Inflation
Led by a sharp seasonal correction in vegetable prices, lower cereals and pulses inflation and deflation in spices, food inflation witnessed moderation in the second half of the FY25 (H2FY25) after scaling its peak in October 2024.
In its Monetary Policy Report for April 2025, the apex bank stated that going ahead, food prices may soften faster, supported by robust kharif crop production and likely bumper rabi arrivals. In such a scenario, headline inflation may moderate by around 50 basis points over the baseline. However, sudden reversals in the prices of perishable food items and reduction of agricultural yields due to adverse climatic conditions may exert upward pressure on food prices, the central bank noted.
“The inflation outlook has improved significantly, with the RBI projecting the CPI at four per cent for FY26, a 20-basis point reduction from earlier forecasts. This improvement is largely attributed to a sharp turnaround in food inflation trends and declining inflation expectations for both three-month and one-year periods, which are expected to help anchor future inflation expectations,” stated Laukik Bagwe, Fund Manager and Head, Fixed Income, ITI Mutual Fund.
Healthy Status Of Rural Demand
The apex bank’s Governor noted that while urban consumption is gradually picking up with an uptick in discretionary spending, on the demand side, bright prospects of the agriculture sector bode well for rural demand, which continues to be healthy. Real GDP growth for 2025-26 is now projected at 6.5 per cent, with Q1 at 6.5 per cent; Q2 at 6.7 per cent; Q3 at 6.6 per cent; and Q4 at 6.3 per cent.
“Real GDP is estimated to grow at 6.5 per cent in 2024-25 on top of a 9.2 per cent growth rate observed in the previous year. In 2025-26, prospects for the agriculture sector remain bright on the back of healthy reservoir levels and robust crop production,” the Governor stated.
Rural demand, supported by healthy crops production and improved reservoir levels, gained strength. Growth in fast-moving consumer goods (FMCG) sales volume in the rural areas, which has been healthy in Q3 and January- February 2025, continued to outpace that of urban areas, the Monetary Policy report highlighted.
Aditi Nayar, Chief Economist and Head – Research and Outreach at Icra stated, “Given the burgeoning global uncertainty, the reduction in the MPC’s FY2026 forecasts for both the CPI inflation and GDP growth by 20 bps each and the change in stance to accommodative, amidst the clarity that it signals the future rate and not liquidity trajectory, we now expect an additional 50 bps of rate cuts over the next three policy reviews.”
Buoyancy in the rural economy, resilient services sector, governments’ efforts to spur household demand through tax incentives and healthy balance sheets of financial entities and corporates, along with the easing of financing conditions, are expected to give a boost to growth.
The Case Of Consumer Prices
RBI highlighted that the surge in headline inflation by 1.8 percentage points from 3.7 per cent in August 2024 to 5.5 per cent in September came from an uptick in price momentum along with sharp unfavourable base effects. The headline CPI momentum quickened pace in October.
However, with a sharp correction in the food price momentum, headline momentum began to register consecutive declines during November 2024 to February 2025, resulting in a softening of headline inflation by 2.6 percentage points during this period to touch a low of 3.6 per cent in February. This decline was despite a sharp pick-up in core momentum in February, the top bank stated. Core here means CPI excluding food and fuel.
“Buoyed by a strong seasonal correction in vegetable prices, assumption of normal monsoon and substantial reduction in global crude oil prices, we expect inflation to remain within RBI target range in the coming quarters,” Hemant Jain, President, PHD Chamber of Commerce and Industry (PHDCCI), stated in a press statement.
The risks to inflation are multifold. On the upside, uncertainties may lead to possible currency pressures and imported inflation. On the downside, the slowdown in global growth could entail further softening in commodity and crude oil prices, putting downward pressure on inflation, as per the Governor. Overall, the top bank stated that domestic economic activity is on a recovery path and is expected to remain resilient, backed by consumption demand.
