RBI Likely to Cut Inflation Target in August MPC as CPI Drops Sharply
India’s inflation story seems ready to flip the script. The Reserve Bank of India (RBI) could revise its inflation target downward for the financial year 2025–26 during the upcoming August Monetary Policy Committee (MPC) meeting. According to a recent report by CareEdge Ratings, Consumer Price Index (CPI) inflation may average just 3.1% in FY26, significantly below the RBI’s current forecast of 3.7%. This bold revision stems from a surprising drop in CPI inflation, which eased sharply to 2.1% in June, the lowest level since January 2019. “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,” the report stated. With inflation falling faster than anticipated, thanks to cooling food prices and a favorable base effect, all eyes now shift to the RBI’s policy tone in August.
Inflation Dips: Food Prices Take The Lead
CPI inflation’s dramatic fall in June caught most economists off guard. According to the CareEdge Ratings report, the food and beverages category, which carries heavy weight in the CPI basket, slipped into deflation. It contracted by 0.2% year-on-year, a rare occurrence. Driving this trend were vegetables (-19%), pulses (-12%), spices (-3%), and meat (-1.6%), which all recorded steep price declines. This price cooldown has provided major relief to consumers and policymakers alike. With robust agricultural output and the base effect from the previous year still in play, analysts expect food inflation to stay under control in the near term.
Inflation Base Effects To Play Catch-up in FY27
While FY26 may see a breather, FY27 could tell a different tale. CareEdge Ratings expects CPI inflation to bounce back to around 4.5%, primarily due to the low base effect from FY26’s moderation. Though this uptick seems steep, it’s more of a mathematical outcome than a macroeconomic panic signal. The report warns that even with subdued food prices, inflation could cross the 4% mark in Q4 of FY26. This potential rebound will likely prompt the MPC to remain cautious, even if it slashes FY26 targets for now.
Inflation Watch: Core Elements Show Mixed Signals
While headline inflation cooled, core inflation presented a mixed bag. It inched up to 4.4% in June, but the rise wasn’t widespread. Precious metals like gold and silver drove this bump. Without them, core inflation stood at a milder 3.5%, signaling underlying price stability. The report emphasized this nuance, clarifying the surge was not broad-based. As global commodity prices remain volatile due to geopolitical tensions and shifting trade policies, analysts advise monitoring the core inflation trend carefully. Still, the larger inflationary environment remains stable, which strengthens the case for a revised monetary stance by the RBI.
Inflation Outlook: RBI May Lower Target Soon
The continued easing in headline inflation gives the RBI room to recalibrate. With CPI inflation likely to undershoot the 3.7% forecast, the central bank could announce a downward revision in its target during the August MPC meeting. While the RBI has adopted a cautious tone in recent policy statements, ground-level price data now supports a softer inflation narrative. However, any revision will still factor in risks from commodity price volatility, weather disruptions, and external shocks. Until then, the market and observers await the August update with bated breath—and calculators at the ready.
(With Inputs From ANI)
