Inflation could be much lower than RBI estimates in FY26 and FY27: SBI report paints optimistic picture

Inflation in the current and the next financial year (FY27) is likely to be significantly lower than the Reserve Bank of India's (RBI) present estimates, according to a report released by the State Bank of India (SBI).

This optimistic outlook is driven by several domestic factors which are set to ease price pressures in the upcoming period, including a healthy monsoon, higher kharif sowing, adequate reservoir levels, a comfortable buffer stock of food grains, and the major impact of GST rate rationalization.

RBI's revised projections

Taking the inflation easing factors into account, the RBI recently revised its FY26 CPI inflation projection, lowering it by 50 basis points to 2.6 per cent. This marks a steep 160 basis point cut from its initial projections in April, news agency ANI reported.

However, the SBI report goes further, arguing that the actual inflation figures for both FY26 and FY27 could be much lower than the RBI's revised estimates, supported by the positive domestic environment.

“RBI has revised downwards its FY26 CPI inflation projection by 50 bps to 2.6 per cent (a 160 basis point downward revision from April levels). We believe both FY26 and FY27 inflation numbers are likely to be much lower,” the report stated.

Alongside inflation, the central bank has also revised its real GDP growth estimate for FY26, increasing it to 6.8 per cent. For FY27, the RBI's inflation projection stands at 4.5 per cent, the news agency reported.

Monetary policy stance and future rate cuts

The Monetary Policy Committee's (MPC) decision to hold the policy rate unchanged is a logical move, given the backdrop of global economic uncertainty and volatile financial markets, the SBI report noted.

The report also suggests that RBI appears to have “left the door open” for future rate cuts. This reference is based on the low inflation forecasts and the recent downward adjustments in growth estimates. While the exact timing of such a move remains uncertain, monetary policy communication is seen as crucial in guiding expectations.

The report also noted that the MPC's status quo decision was characterised as a rare form of dynamism, facilitated by comfortable liquidity conditions in the financial system and a benign external sector despite ongoing trade-led uncertainties.

SBI concludes that the domestic financial system is poised to benefit the most from the forward-looking reforms which are aimed at strengthening India's global positioning and reinforcing its already resilient economic ecosystem, ANI reported.