RBI Lowers Inflation Projection by 10 bps; Lifts FY27 Growth Forecast Despite Global Risks

The Monetary Policy Committee (MPC) on Wednesday held the benchmark repo rate unchanged at 5.25% and maintained a neutral stance. Despite persistent geopolitical uncertainty and relatively elevated crude oil prices, the central bank lowered its inflation projection at the August policy meeting.

The RBI revised its Consumer Price Index (CPI) inflation forecast, the central bank's preferred gauge of inflation, to 5% from 5.1% estimated at the June policy meeting. Accordingly, inflation for the financial year is projected at 4.7% for Q2, 5.9% for Q3, and 5.5% for Q4 before moderating to 5.3% in Q1FY28.

"The MPC noted that headline CPI inflation edged up above the target, as expected," RBI Governor Sanjay Malhotra said. "The higher inflation is mostly on account of fuel and food, with little signs of generalisation of price pressures so far. Core inflation, excluding precious metals, continues to be benign."

Global Uncertainty Fuels Inflationary Risks

Malhotra added that although inflation is expected to rise, it is primarily due to supply-side pressures from food and fuel. India's retail inflation, based on the CPI, rose to 4.38% in June.

According to the data, the increase in June inflation was driven by higher food and fuel prices. Food inflation became broad-based, with most components in the CPI basket witnessing price pressures during May and June.

Fuel inflation was driven by the revision in domestic retail fuel prices following the sharp rise in global energy prices.

Speaking on the inflation outlook, Malhotra said volatile global crude oil prices continue to cloud the near-term outlook, while higher food, fuel and input costs add to upside risks to inflation.

Economists and analysts argue that, amid uncertainty over a ceasefire between the US and Iran and continued volatility in the global oil market, policymakers are walking a tightrope to maintain growth momentum while keeping inflation under control.

Growth Projections Revised Upward

Amid the evolving geopolitical landscape, El Niño conditions and upside risks to inflation, the RBI revised its FY27 GDP growth forecast upward by 10 basis points to 6.7%, from 6.6% projected earlier. Growth is now projected at 7% for Q1, 6.4% for Q2, 6.5% for Q3 and 6.8% for Q4.

"Growth continues to be supported by resilient domestic demand, sustained expansion in manufacturing and services activity, and robust exports, reaffirming India's position as the world's fastest-growing major economy," Malhotra said in his MPC statement.

He added that domestic economic activity has remained resilient, as reflected in high-frequency indicators, including healthy corporate balance sheets for the quarter ended June, signalling robust performance in the manufacturing sector.

Services activity also remained strong, supported by domestic demand, while private consumption continued to be buoyed by discretionary spending.

Investment activity remained steady, backed by government spending on infrastructure and construction.