New Delhi — The Reserve Bank of India on Friday sharply revised its inflation outlook for the fiscal year 2025–26 (FY26), projecting retail inflation at just 2 % This marks a significant downward adjustment from its prior estimate of 2.6 percent.

In presenting the figures, RBI Governor Sanjay Malhotra noted that headline price pressures have eased far more than anticipated. The central bank cited robust food supply — aided by a strong kharif harvest and healthy rabi sowing prospects — along with softer international commodity prices (excluding certain metals) as key factors behind the moderation.

According to the new projections, consumer-price index (CPI) inflation for Q3 of FY26 is expected to drop to just 0.6 percent, before rising slightly to 2.9 percent in Q4. The RBI also projected that inflation in the first half of FY27 will remain moderate, staying at or below 4 percent.

Low inflation outlook paves way for supportive monetary stance

The downward revision in inflation gives the RBI room to support economic expansion through growth-friendly monetary policy. Indeed, along with the inflation update, the central bank raised its GDP growth forecast for FY26 to 7.3 percent, up from the earlier 6.8 percent.

In fact, during the policy meeting, the RBI’s Monetary Policy Committee (MPC) announced a 25 basis-point cut in the repo rate, bringing it down from 5.50 percent to 5.25 percent. The move underscores the shift in RBI’s tone — from guarding against inflation to actively supporting growth.

Governor Malhotra described the current economic situation as something of a “rare goldilocks period” — where the economy is enjoying both strong growth and low inflation.

Why inflation eased more than expected

RBI’s decision reflects multiple favourable developments. First, food inflation has remained subdued. Thanks to good monsoon rains, ample reservoir levels and timely sowing, agricultural output is healthy. Combined with stable supply chains, this has helped keep food prices under control.

Second, core inflation — which excludes food, fuel, and precious metals — also appears well-behaved, suggesting underlying price pressures have softened. Precious metal price fluctuations, which had earlier contributed to inflation, now account for about 50 basis points only, according to the RBI. Lastly, GST rate cuts and improving economic conditions have further eased overall consumer prices.

What this means for borrowers, markets and policymakers

With inflation comfortably below the upper levels of RBI’s tolerance band, the central bank now has flexibility to keep borrowing costs low. The rate cut to 5.25 percent is likely to translate into cheaper home and consumer loans.

For markets, the dovish stance — marked by falling inflation and a rate cut — could ignite fresh enthusiasm. Lower rates tend to support equities, corporate borrowing, and capital inflows. At the same time, domestic savers may find fixed-income instruments less attractive.

For policymakers and fiscal managers, low inflation reduces pressure to raise indirect taxes. It also provides more headroom for government spending on growth-oriented programmes without overheating the economy.

Risks and what to watch out for

Despite the optimistic projection, risks remain. External factors such as global commodity price swings, rising oil prices, or further depreciation of the rupee could push inflation back up. The weakening rupee — which recently traded near 90 per US dollar — may boost import costs and revive price pressures.

Additionally, supply-side disruptions — whether from poor monsoon, adverse weather, or logistics constraints — could still hit food prices. The downward projection relies heavily on favourable conditions holding through the rest of FY26.

Conclusion

The updated inflation outlook from the RBI — just 2.0 percent for FY26 — signals a strong vote of confidence in the Indian economy’s ability to deliver stable prices in tandem with healthy growth. Coupled with a rate cut, the move reflects a deliberate shift towards supporting growth and credit demand. Yet, with global uncertainties and domestic vulnerabilities, the RBI's optimism will be tested. Policymakers, markets and households alike will now keenly watch whether this “Goldilocks” scenario endures or gives way to fresh economic headwinds.