RBI monetary policy: Central bank projects inflation at 4.2% for FY26

RBI Monetary Policy: The new Reserve Bank of India (RBI) Governor Sanjay Malhotra delivered a 25 basis points rate cut on Friday, February 26, the first such move by the country's central bank in almost five years, in a bid to spur the slowing Indian economy. The RBI money policy committee (MPC) voted unanimously to cut the repo rate and maintained its monetary policy stance at "neutral".

The MPC noted that though growth is expected to recover, it is much lower than last year and inflation dynamics have opened space for rate easing, RBI governor Sanjay Malhotra said in the first policy review since his appointment in December.

Inflation Projection

Commenting on the consumer price inflation (CPI), the RBI Governor said MPC noted that core inflation has declined supported by a favourable outlook on food and continuous transmission of past policy action.

Going ahead, food inflation pressures should see a significant softening due to good Kharif production, winter-easing in vegetable prices and favourable rabi crop prospects, Governor Malhotra added.

Against this backdrop, the RBI pegged the FY26 inflation target at 4.2% while it retained the forecast for FY25 at 4.8%. The Q4 FY25 inflation projection was revised to 4.4% from 4.5% earlier. Similarly, the Q1 FY26 inflation estimate was revised lower to 4.5% from 4.6% earlier. Inflation in Q2 FY26 is projected at 4%, the same as earlier. Meanwhile, for Q3 FY26 and Q4 FY26, inflation estimates are pegged at 3.8% and 4.2%, respectively.

Food inflation pressures are expected to ease, Malhotra said, but added that uncertainty in global financial markets coupled with volatility in energy prices pose a risk to the inflation outlook.

Growth Projections

The RBI MPC projected real GDP growth for FY26 at 6.7% with Q1 at 6.7%, Q2 at 7%, and Q3 and Q4 at 6.5% each.

FY26 growth will be driven by healthy rabi prospects and an expected recovery in industrial activity, while headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties, continue to pose downside risks to the outlook, Malhotra said in his policy address.

The next meeting of the MPC is scheduled for April 7 to 9, 2025.