The Reserve Bank of India on Friday lowered its inflation projections for 2025-26 as headline CPI softened to a near six-year low of 3.2 per cent in April. The central bank now projects CPI inflation for 2025-26 at 3.7 per cent, with Q1 at 2.9 per cent, Q2 at 3.4 per cent, Q3 at 3.9 per cent, and Q4 at 4.4 per cent.

In the April monetary policy, the projection for CPI inflation was 4.0 per cent for 2025-26, with Q1 at 3.6 per cent, Q2 at 3.9 per cent, Q3 at 3.8 per cent, and Q4 at 4.4 per cent.

“The outlook for inflation points towards benign prices across major constituents. The record wheat production and higher production of key pulses in the Rabi crop season should ensure an adequate supply of key food items. Going forward, the likely above normal monsoon along with its early onset augurs well for Kharif crop prospects. Reflecting this, inflation expectations are showing a moderating trend, more so for the rural households,” said RBI governor Sanjay Malhotra.

The governor, however, said that despite the favourable prognosis, the central bank remains watchful of weather-related uncertainties and still evolving tariff-related concerns with their attendant impact on global commodity prices.

Economists on Friday said that inflation is expected to remain aligned with the 4 per cent target of the RBI this financial year and is unlikely to see a major upward revision of the current economic situation.

“Soft crude oil and commodity prices mean the risk of imported inflation is lower. Crude oil prices are expected to stay subdued around $65 per barrel this fiscal compared with $78.8 in the last fiscal. If the forecast of plentiful rains comes true this monsoon, the inflation gains will be durable. Healthy output and above-norm buffer stocks of foodgrains will also check prices,” said Dharmakirti Joshi, chief economist, Crisil.

“But climate-related risks to agriculture, particularly for vegetables, which are more vulnerable, have become more frequent and will need close watch. As the economy is likely to grow near to below potential this year, pressure on core inflation from excess demand is unlikely,” Joshi said.

Growth unchanged

The RBI has kept the real GDP growth rate unchanged at 6.5 per cent for 2025-26 from its previous forecast in April.

“The outlook for the agriculture sector and rural demand is expected to receive further impetus by the expected above normal southwest monsoon rainfall. On the other hand, sustained buoyancy in services activity should nurture revival in urban consumption. The healthy balance sheets of banks and corporates, the government’s continued thrust on capex, elevated capacity utilisation, improving business optimism, and easing of financial conditions should help further revive investment activity,” said Malhotra.

However, the RBI governor said that the spillovers emanating from protracted geopolitical tensions, global trade and weather-related uncertainties pose downside risks to growth.

“Clearly, India’s growth has been largely driven by domestic demand. Within domestic demand, it is mainly the government’s capital expenditure which has been driving India’s growth. A more balanced profile of growth drivers would call for a tangible pickup in private investment demand and external demand. While much can not be said about the way external demand might evolve, domestic private investment demand can be stimulated. In this context, monetary policy is of considerable importance since it affects the cost of capital,” said DK Srivastava, chief policy advisor, EY India.

FDI trend

On the moderation of net foreign direct investment to $0.4 billion in 2024-25 compared to $10.1 billion in the previous year, RBI governor Malhotra said that the momentum remains strong on the gross FDI inflows which rose by around 14 per cent to $81 billion in 2024-25 from $71.3 billion in the previous year even as higher repatriation has pulled down net inflows.

“Rise in repatriation is a sign of a mature market where foreign investors can enter and exit smoothly, while high gross FDI indicates that India continues to remain an attractive investment destination,” the governor said.