RBI to lower inflation target for FY26 in upcoming August MPC, inflation to surge to 4.5% in FY27: Report

The report highlighted that the Consumer Price Index (CPI) inflation may average around 3.1 per cent in FY26, significantly below the RBI's current projection of 3.7 per cent. For FY27, inflation is expected to remain higher at around 4.5 per cent, due to the low base effect from FY26.

It stated, "MPC to Lower Inflation Target...CPI inflation to average around 3.1 per cent in FY26. Given the low base of FY26, we expect average CPI inflation to be higher, around 4.5 per cent in FY27".

According to the report, headline CPI inflation eased sharply to 2.1 per cent in June, coming in below expectations and marking the lowest level since January 2019. The decline in inflation was primarily driven by continued moderation in food prices and a favourable base effect from the previous year.

Within the CPI basket, the food and beverages category entered into deflation, contracting by 0.2 per cent year-on-year in June. This was led by steep declines in prices of vegetables (-19 per cent), pulses (-12 per cent), spices (-3 per cent), and meat (-1.6 per cent).

Looking ahead, the report mentioned that the food inflation is expected to remain contained, supported by healthy agricultural output and continued base effect support.

Meanwhile, core inflation saw a slight rise to 4.4 per cent in June, but the report clarified that this was not broad-based and was primarily driven by higher prices of precious metals. When gold and silver are excluded, core inflation stands at a more moderate 3.5 per cent.

Despite the global demand slowdown, the report notes that geopolitical developments and trade policy changes could continue to impact commodity prices. Therefore, close monitoring of these factors remains essential.

Overall, the report expects the inflationary environment to remain favourable in the coming quarters. However, CPI inflation could edge above the 4 per cent mark in the fourth quarter of FY26 as the favourable base effect diminishes.

With CPI inflation likely to undershoot the RBI's current FY26 forecast, the central bank may revise its inflation target downward in the upcoming monetary policy meeting. (ANI)