The Reserve Bank of India (RBI) on Tuesday left its benchmark repo rate unchanged at 5.5% for the second straight policy review, but the real story lay in its inflation recalibration: consumer prices are projected to rise just 2.6% in FY26, far below earlier estimates and the central bank’s medium-term target of 4%.
The downward revision, of 50 basis points from the August forecast and 160 basis points from April, marks one of the sharpest disinflationary turns in recent policy cycles. It reflects a powerful combination of benign food prices, robust monsoon output, and the recent Goods and Services Tax (GST) rationalisation that is expected to ease costs across supply chains.
RBI now sees CPI inflation dipping to 1.8% in Q2 and Q3 of FY26 before rebounding to 4.0% in Q4 as base effects fade. For FY27, inflation is pegged at 4.5%, but economists argue the trajectory may undershoot if fiscal consolidation continues and global commodity prices remain range-bound.
“This is not just a moderation — it’s a collapse in price pressures,” said QuantEco Research. “Food disinflation has surprised on the downside, and GST reforms are adding a structural disinflationary impulse” .
Bank of Baroda economists flagged the convergence of multiple drivers: surplus rainfall, steady reservoir levels, higher kharif sowing, and restrained increases in minimum support prices. “The benign outlook on food inflation is reinforced by supply-side resilience. Core inflation, too, will soften as GST cuts lower indirect tax pass-throughs,” said Aditi Gupta of BoB .
Growth and the Inflation-Growth Trade-off
Even as inflation undershoots, the central bank nudged its growth forecast higher to 6.8% for FY26, citing buoyant domestic demand and the GST overhaul. But the trajectory is uneven: Q2 is forecast at 7.0%, while Q3 and Q4 are expected to slow to 6.4% and 6.2% respectively.
“The upgrade looks good on paper, but the H2 slowdown is clear,” said SBI Research. “RBI’s inflation comfort allows it to leave the door open for rate cuts if external shocks deepen” .
The inflation-growth trade-off is now tilted in favour of easing. With CPI tracking almost half the 4% target, the case for a rate cut later this fiscal strengthens, though RBI is cautious about global headwinds.
Tariff Shocks and Inflation Insulation
The benign inflation trajectory comes at a time of heightened external risks. The United States has doubled tariffs on India’s Russian crude imports to 50%, slapped duties on wood, trucks, and branded drugs, and imposed a steep increase in H-1B visa fees. Economists say these measures threaten growth more than inflation.
“Tariff shocks are likely to depress exports and remittances rather than drive domestic prices higher,” said QuantEco . “The inflation outlook is cushioned by strong food supply and GST reforms. The risk is on growth, not prices.”
Indeed, RBI’s communication leaned heavily on its inflation comfort as justification for holding rates steady while flagging downside risks to growth.
Structural Easing to Anchor Inflation
While not cutting rates, the RBI rolled out a series of regulatory measures that indirectly reinforce its inflation management strategy by lowering costs of credit and improving supply-side efficiency.
Key moves include:
- Risk Weights: Lowering capital requirements for MSME, housing, and infrastructure lending, which should reduce borrowing costs.
- Risk-Based Deposit Insurance: Cutting annual outflows for strong banks by ₹1,300–1,500 crore, creating room for cheaper lending .
- Expected Credit Loss (ECL) Framework: Aligning provisioning norms with global standards by 2027, expected to improve credit pricing and reduce risk premia.
- Rupee Internationalisation: Expanding INR-denominated trade finance to neighbouring countries, reducing dependence on dollar funding and insulating import costs from exchange volatility .
“These regulatory measures are inflation-positive in the medium term,” said Soumya Kanti Ghosh of SBI. “By lowering structural costs in banking and trade finance, the RBI is anchoring disinflation while preparing the system for future credit expansion” .
Inflation Risks: What Could Go Wrong?
Despite the sanguine outlook, economists point to three risks:
- Global Commodities: Any resurgence in oil or food commodity prices could alter the benign trajectory, especially with U.S. sanctions affecting crude sourcing.
- Geopolitical Tensions: Escalating conflicts in Europe or the Middle East could revive imported inflation through supply chain disruptions.
- Domestic Weather Shocks: Excess or deficient rainfall in the next rabi season could upset food disinflation gains.
Yet, for now, analysts see risks skewed to the downside. “It is unusual for India to project inflation below 3% for a full year. If GST reforms and monsoon trends hold, the RBI could be presiding over one of the lowest inflation cycles in decades,” said QuantEco .
Bonds and Market Reaction
Bond markets welcomed the disinflation surprise, with the 10-year yield holding steady at around 6.35%. Analysts expect yields to drift lower if the RBI signals an actual rate cut later this year. QuantEco retained its call of 6.30% for March 2026 .
“Markets are reading this as dovish — not because rates were cut, but because inflation has collapsed and two MPC members are already voting for an accommodative stance,” said a senior bond trader at a foreign bank.
Outlook: Inflation Dictates Timing
The October review underscores how inflation dynamics, not growth, will dictate the RBI’s next move. With CPI tracking well below the target and GST reforms reinforcing disinflation, the central bank has space to act if growth falters.
Most analysts expect a 25 bps cut later this fiscal. “The question is not whether the RBI has room — it clearly does,” said Bank of Baroda’s Gupta. “The question is when it will choose to deploy it” .
Until then, the RBI is relying on structural reforms — from credit easing to rupee internationalisation — to keep price pressures muted while supporting growth.
For households and businesses, the message is equally clear: inflation is no longer the binding constraint on policy. Growth, and how external shocks play out, will decide the trajectory ahead.