RBI cuts FY27 inflation forecast to 5% as June CPI undershoots projection

Reserve Bank Governor Sanjay Malhotra on Wednesday lowered the inflation projection for the current financial year by 10 basis points to 5%, even as risks from erratic monsoon distribution, volatile crude oil prices and geopolitical tensions persist.

Announcing the bi-monthly monetary policy, Malhotra said consumer price index (CPI) inflation rose to 4.4% in June after remaining below the RBI's target for 16 consecutive months, but was "lower by 30 basis points than what was our earlier projection".

He said the increase in June inflation was driven primarily by higher food prices, fuel inflation and fuel-induced inflation in select categories such as restaurant services.

"Notwithstanding the pressure from higher input costs, core inflation, which excludes food and fuel, remained unchanged at 3.9% in May and June," Malhotra said.

The RBI now expects inflation at 4.7% in the second quarter, 5.9% in the third quarter and 5.5% in the fourth quarter of FY27.

Inflation for the first quarter of the next financial year is projected at 5.3%.

Risks are "evenly balanced", Malhotra said.

In its previous policy review in June, the RBI had projected FY27 CPI inflation at 5.1%, with quarterly projections of 5.1% for the second quarter, 5.9% for the third quarter and 5.4% for the fourth quarter.

The RBI also revised the core inflation projection for FY27 to 4.3% from the earlier estimate of 4.7%.

Core inflation excluding precious metals was even lower at 2.3-2.5% during the period, indicating that underlying demand-side price pressures remain contained, Malhotra added.

The governor warned that the impact of El Nino on the temporal and spatial distribution of rainfall remains a key risk to the inflation outlook.

"Although proactive supply management and adequate stock of foodgrains should provide comfort," he said.