CPI Inflation Hits 77-Month Low: RBI Sees 3.1% in FY26- Relief or Just a Blip?

The Reserve Bank of India (RBI) has sharply revised down its CPI inflation forecast for FY2025-26 to 3.1%, citing a significant easing in price pressures across food and non-food components. This marks a drop from its earlier projection of 3.7% and signals the lowest headline inflation outlook in over six years.

The announcement came after the conclusion of the Monetary Policy Committee (MPC) meeting on August 6, where the central bank also decided to hold the repo rate steady at 5.5%, maintaining its neutral stance.

“Core inflation has remained steady at 4%, as expected,” said RBI Governor Sanjay Malhotra, adding that the current policy setting reflects “balanced risks” and continued macroeconomic stability.

Q2 Inflation Estimate Slashed to 2.1%
The biggest revision came in the Q2 FY26 forecast, which was slashed to 2.1% from 3.4%. The Q3 estimate was also brought down to 3.1% from 3.9%, while Q4 remains unchanged at 4.4%. The central bank also introduced a forecast for Q1 FY27 at 4.9%.

“The inflation outlook for 2025-26 has become more benign than expected in June,” said Malhotra, attributing the moderation to a favourable monsoon, ample food stock levels, and double-digit deflation in vegetable prices.

Market Expert Ajay Bagga said, “RBI held rates steady while reducing the inflation outlook and maintaining the GDP growth rate as per the previous forecasts. In a unanimous decision, the MPC voted to keep the policy stance at Neutral . Bond markets were expecting no rate cut so there the move is muted. But stock markets are showing some disappointment as the rate cut ahead of the festive season would have helped boost consumption and reduce the cost of bank credit. ”

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Food Inflation Turns Negative for First Time Since 2019
CPI inflation declined for the eighth straight month, hitting a 77-month low of 2.1% in June. This was largely driven by food, with vegetables and pulses showing double-digit deflation—a trend not seen since February 2019.

“Food inflation recorded its first negative print since February 2019, at negative 0.2%,” said Malhotra.
Supporting this decline were factors such as a strong southwest monsoon, healthy kharif sowing, comfortable reservoir levels, and active supply-side measures from the government.

Core Inflation Holds, But Gold Pushes Q4 Estimate
While food prices are falling, core inflation has seen a slight uptick, driven largely by rising gold prices.
“Core inflation increased slightly to 4.4%, driven by a rally in gold prices,” Malhotra noted, suggesting a temporary rise in Q4 FY26 inflation due to base effects and prior demand-side policy actions.

Policy Remains on Hold, But RBI in Wait-and-Watch Mode
Despite cutting its inflation outlook, the RBI has not shifted its policy stance. It believes that the full impact of the earlier 100-basis-point rate cut is still unfolding and warrants further observation.
 

“The impact of the 100-basis-point rate cut is still unfolding,” said Malhotra, adding that the RBI continues to assess transmission to the broader economy.

Industrial Growth a Weak Spot
The central bank flagged continued patchiness in industrial output, calling it “subdued and uneven.” However, the inflation landscape remains under control, giving policymakers more breathing room.

High-Frequency Data Supports Lower Price Trend
Preliminary data for July 2025 shows continued disinflation in fruit and other food items. Combined with strong agricultural performance, the RBI expects this momentum to hold through most of FY26, though inflation could rebound slightly above 4% in Q4 due to base effects and latent demand-side pressure.