RBI cuts FY26 CPI inflation forecast to 3.1%, Q2 inflation estimated at 2.1%

The Reserve Bank of India (RBI)'s Monetary Policy Committee (MPC) on Wednesday, August 6, projected India's CPI inflation for the full year 2025-26 to be at 3.1%, lower than June estimates of 3.7%.

Retail inflation in June eased to a 77-month low of 2.1% from 2.8% in May on the back of falling food prices. The June figure was closer to the RBI's lower tolerance band of 2%.

“Inflation is much lower than projected earlier due to volatile food prices, especially in vegetables... but is projected to go up from the last quarter of FY26,” RBI Governor Sanjay Malhotra said on Wednesday.

The Consumer Price Index (CPI) Inflation for the second quarter of FY26 is projected at 2.1% from 3.4% earlier, while the estimates for Q3 and Q4 are at 3.1% (against 3.9%) and 4.4% (against 4.4%), respectively. For Q1 FY27, CPI inflation is projected at 4.9%.

The CPI inflation in Q4 would go above the RBI's target of 4% due to unfavourable base effect and demand side factors from policy actions, Governor Sanjay Malhotra said.

Further, core inflation is also expected to be slightly above 4% during the year, as long as there is no major negative shock to input prices, he added.

In the last three MPC meetings this year, the RBI frontloaded repo rate cuts, reducing the key interest rate by 100 basis points (bps) to 5.5% in June from 4.5% in February.

This month, experts anticipated that the central bank would go for the pause-and-act strategy, waiting for more macroeconomic data before introducing any more rate cuts.

Other key highlights of August MPC meet

• The RBI kept the standing deposit facility rate unchanged at 5.25%, and the marginal standing facility rate and the bank rate at 5.75%.

• The six-member MPC noted that the inflation outlook in the near term has become more benign than anticipated earlier, and the average CPI inflation this year is forecasted to remain significantly below the target.

• The apex bank retained FY26 GDP growth projection at 6.5%, supported by strong government capital expenditure, resilient rural consumption, and improving investment climate. However, uneven industrial growth and global uncertainties pose risks to the GDP outlook.

• The July Services PMI hit an 11-month high of 60.5, and the urban demand recovery remains slow.