RBI Cuts Inflation Forecast to 2.6% for FY26; SBI Sees Even Lower Levels

The country's inflation rate is expected to be lower than the Reserve Bank of India's (RBI) estimates for the current and upcoming financial years. According to the SBI report, several reasons contribute to this decline in inflation, including the good progress of the monsoon, strong reservoir levels, sufficient food grain reserves, and GST reforms. These factors collectively are leading to a faster reduction in inflation than initially anticipated.

The RBI has decreased its retail inflation forecast for 2025-26 by 0.50 percent to 2.6 percent, making it 1.6 percent lower than the April estimate. However, SBI Research believes that inflation will remain lower than expected in 2025-26 and 2026-27. In its recent projection, the RBI forecasted inflation at 4.5 percent for the first quarter of FY2026-27, i.e., April-June 2026. Considering global uncertainties and market volatility, the Monetary Policy Committee's (MPC) decision to keep rates unchanged appears justified.

Due to the decrease in GST rates and lower crude oil prices, inflation is less of a concern this fiscal year. According to Crisil, the initial rate cuts by the US Federal Reserve have created room for the RBI to reduce rates. The US central bank is expected to make two more rate cuts in the remaining months of 2025. The RBI may also implement one rate reduction. GST reforms could further ease inflation, depending on when producers pass on these benefits to consumers. This is likely to significantly lower inflation. Brent crude is projected to average $62-67 per barrel this fiscal year.

Crisil stated that the MPC seems satisfied with the developments so far and may be keeping monetary policy options open to respond if downside risks to growth arise. Favorable inflation prospects leave room for further monetary policy easing.