RBI Governor Predicts Inflation Will Align with Target in FY26

RBI Governor Sanjay Malhotra has expressed confidence that inflation in India will align with the target during the current financial year (FY26), aided by the decline in crude oil prices and ongoing trade-related uncertainties. In the minutes released from the Monetary Policy Committee (MPC) meeting held from April 7 to 9, Malhotra highlighted that the pressure on domestic inflation would ease due to these factors, which would help keep inflation within the mandated target.

The Indian government has set a target for the MPC to maintain consumer price index (CPI) inflation at 4%, with a permissible band of +/- 2%. Malhotra noted that while tariffs could affect inflation in two ways—raising it through currency pressures caused by trade uncertainties and lowering it by contributing to a global slowdown that could soften commodity and crude oil prices—the overall outlook for inflation remains favorable. He emphasized that factors likely to ease inflation outweigh those that could negatively impact it, setting the stage for continued disinflation in the headline CPI.

Malhotra projected that inflation would align well with the target during FY26, supported by favorable conditions. He further explained that once CPI inflation is around its target rate of 4% and economic growth remains moderate and recovering, monetary policy would need to encourage domestic demand to fuel further growth momentum. In the April meeting, the six-member MPC unanimously decided to reduce the repo rate by 25 basis points to 6%, marking the second consecutive policy rate cut. Alongside the reduction, the MPC shifted its stance from "neutral" to "accommodative."

India's retail inflation, or CPI, dropped to 3.3% in March 2025, down from 3.6% in February, marking the fourth consecutive monthly decline and the lowest reading since August 2019. Malhotra noted that the Indian economy is less vulnerable to global growth slowdowns, driven predominantly by domestic demand, though it is not immune to external disturbances.

External MPC member Saugata Bhattacharya predicted that inflation in India would remain moderate throughout FY26. Bhattacharya saw this as an opportunity for more favorable policy easing, though he cautioned that if trade tariff actions are not significantly reduced, global trade and growth could slow considerably, which could have negative implications for India.

RBI Deputy Governor M. Rajeshwar Rao acknowledged the uncertainty regarding the impact of US tariffs on India, noting that the US is India’s largest export destination. He cautioned that these tariffs could affect trade, financial markets, and domestic economic activity, adding downward pressure to GDP growth. Rao stressed that decisive policy support for growth was necessary to navigate the challenges posed by global uncertainty.

MPC member Rajiv Ranjan echoed these concerns, highlighting that although India is largely driven by domestic demand, growth could be impacted by lower external sector contributions and heightened investment uncertainty. External member Ram Singh pointed out that while food inflation prospects had improved, global market uncertainties and weather-related disruptions still pose risks to inflation. Finally, Nagesh Kumar, another MPC member, emphasized the importance of remaining vigilant to the evolving global situation and its potential impact on India's growth outlook.

Overall, the MPC’s discussions underscored a delicate balancing act for India’s monetary policy, seeking to maintain inflation within target while supporting growth in the face of global uncertainties.