RBI Forecasts Inflation Below 4% in FY26: Key Drivers and Economic Outlook

The Reserve Bank of India (RBI) has expressed strong confidence in keeping headline inflation aligned with its 4% target throughout the financial year 2025–26, aided by easing food prices and supportive economic conditions.
In its Annual Report released on Thursday, the central bank highlighted that inflation had already dropped below the 4% target in February and March 2025, largely due to a sharp decline in food inflation. This trend, the RBI said, has strengthened hopes for a durable alignment with its medium-term goal.

“With inflation falling below the target in February and March 2025, supported by a sharp fall in food inflation, there is now greater confidence about a durable alignment of headline inflation with the target of 4.0 per cent over a 12-month horizon,” the report noted.

Headline Inflation

Headline inflation, which captures overall price changes across goods and services including volatile components like food and fuel, averaged 4.6% in FY25—down from 5.4% in FY24. Notably, fuel prices saw a 2.5% deflation, while core inflation (excluding food and fuel) eased to 3.5%.

The RBI maintained that the current moderate growth and benign inflation scenario support a pro-growth monetary stance, though it urged caution due to rapidly evolving global dynamics.

Food Inflation

Food inflation, once a concern at 9.7% in October 2024, declined sharply to 2.9% by March 2025. The central bank, however, flagged a slight uptick in core inflation in the latter half of the fiscal, primarily due to rising global gold prices.
Looking ahead, the RBI forecast a favorable inflation outlook for FY26, driven by softening global commodity prices, reduced supply chain pressures, and expectations of a robust agricultural output due to an above-normal monsoon.
On the global front, inflation declined to 5.7% in 2024 from 6.6% in 2023 and is expected to ease further to 4.3% in 2025 and 3.6% by 2026.

Despite the optimism, the RBI cautioned against persistent risks such as sticky services inflation globally, rising tariffs in the U.S., fragmented monetary policies, geopolitical tensions, and climate-related shocks—any of which could disrupt the inflation trajectory and growth momentum.

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