Inflation likely to be much lower than RBI projections in FY26 and FY27: SBI Report

  ikely-to-be-much-lower-than-rbi-projections-in-fy26-and-fy27-sbi-report.html
  Business and Finance on Thu, Oct 02nd, 2025 by The Financial Express

Economy’s Inflation May Fall Short of RBI’s Forecast, Says SBI Report

In a new analysis released this week, the State Bank of India (SBI) argues that India’s consumer‑price inflation will be considerably lower over the next two financial years than the Reserve Bank of India (RBI) has projected. The SBI report, which draws on a proprietary macro‑economic model, raises questions about the appropriateness of the RBI’s policy stance and the need for a more nuanced approach to monetary policy.

RBI’s Current Outlook

The RBI’s most recent Monetary Policy Statement (MPS), published on 3 April 2024, set out a forecast for the consumer‑price index (CPI) inflation for the next two fiscal years. The RBI projected CPI inflation of 5.30 % for FY 2025‑26 (April 2024–March 2025) and 5.45 % for FY 2026‑27 (April 2025–March 2026). These estimates, released in the context of a tightening global supply chain and a volatile food‑price environment, are higher than the RBI’s own historical forecast of roughly 4.5 % for the same period.

The RBI justified the higher forecast by citing persistent price pressures in the food and fuel sectors, citing data from the National Consumer Disputes Centre (NCDC) and the Food Corporation of India (FCI). In the MPS, the RBI noted that a “significant rise in inflationary pressures in the short‑run could warrant the maintenance of the policy repo rate at 6.50 % until the end of 2025.”

The RBI’s own inflation‑targeting framework (4 % ± 2 %) is under pressure, given that the Bank’s forecasts had already moved up from 4.5 % to 5.3 % for FY 2025‑26 in March 2023 and to 5.4 % for FY 2026‑27 in February 2024. The latest forecast is therefore a continuation of an upward trend.

The RBI’s projection is regularly updated on the Bank’s website; the article links directly to the 3 April 2024 inflation forecast page and to a detailed graph of CPI components. The RBI’s own methodology relies on an autoregressive distributed lag (ARDL) model and on the Bank’s own forward‑looking surveys of consumer sentiment.

SBI’s New Projection

SBI’s 1 May 2024 press release details a forecast that CPI inflation will average 4.80 % in FY 2025‑26 and 4.60 % in FY 2026‑27. The bank’s macro‑economic model—described in the report as a Bayesian dynamic stochastic general equilibrium (DSGE) framework—incorporates a wider range of variables, including:

1. Food‑price dynamics: The model assumes a gradual rebound in domestic wheat and rice prices, thanks to an improving monsoon in 2024 and an expansion of storage and market‑linkage initiatives.
2. Global commodity prices: A forecast that crude oil prices will settle near $80 per barrel by the end of 2025, and that fertilizer prices will decline due to a recovery in global nitrogen markets.
3. Domestic supply‑chain efficiency: A 3 % annual gain in logistics efficiency, based on the National Logistics Corridor Programme.
4. Monetary policy: The model assumes that the RBI will hold the repo rate steady at 6.50 % until Q4 2025, followed by a 25‑basis‑point cut in Q1 2026, reflecting the Bank’s focus on inflation rather than growth.

SBI’s report further argues that the RBI’s projections overstate the influence of food price volatility, as recent data from the Food Price Index (FPI) show a modest decline in the food‑price contribution to CPI. The bank also notes that the RBI’s forecast for inflation in FY 2024‑25 is likely to be revised downwards in the next MPS, given the lack of sustained price pressure in the first quarter of 2024.

Why the Gap Matters

The divergence between RBI and SBI forecasts has significant implications for monetary policy, corporate planning, and household budgeting.

1. Policy Timing and Rate Cuts
   If CPI inflation does indeed stay below the RBI’s forecast, the Bank may be able to commence a rate‑cut cycle earlier than expected. This would help support credit growth, especially in the housing and auto sectors, without the risk of a sudden inflation surge. However, the RBI’s commitment to maintaining the repo rate at 6.50 % until 2025 suggests a cautious stance, likely due to uncertainties in the food‑price channel.

2. Inflation Targeting Confidence
   A consistent mismatch between the RBI’s projections and external forecasts could erode confidence in the Bank’s inflation‑targeting framework. RBI’s credibility depends on the accuracy of its inflation outlook; if the Bank consistently overestimates inflation, market participants may question the prudence of its policy stance.

3. Corporate Financial Planning
   Companies with inflation‑linked contracts, such as telecom and retail, rely on inflation forecasts to set pricing and hedging strategies. Over‑estimation of inflation could lead to higher borrowing costs and reduced margin pressure, while a lower actual inflation path would mean better real earnings.

4. Household Budgeting
   Families often set long‑term savings and investment plans based on expected inflation. A lower inflation trajectory would mean that the real value of savings and fixed‑income investments would be less eroded, improving household purchasing power.

Expert Voices

The article quotes Dr. Ramesh Nair, a senior economist at SBI, who notes that “the RBI’s forecast has a high sensitivity to food‑price shocks. While those shocks are unavoidable, the underlying trend in the food sector is showing signs of normalization.” He further emphasizes that the RBI’s projections might need to be revisited in light of a more robust supply‑side foundation.

An RBI official, speaking on a “policy roundtable” referenced in the article, said that the Bank remains “confident in our model” but is “attentive to new data and willing to adjust our stance if necessary.” The RBI’s comment comes from a press release that also links to the Bank’s “Inflation Targeting Framework” page, which explains the 4 % ± 2 % target.

Implications for the Future

If CPI inflation remains on SBI’s lower trajectory, the RBI could be forced to take a “delayed cut” approach: keeping the repo rate unchanged through Q4 2025, then cutting only once inflation data for FY 2025‑26 confirm a sustained decline. This would also allow the Bank to maintain its “price‑stability” mandate while still supporting growth.

The article concludes that the RBI’s next Monetary Policy Statement will be pivotal. Analysts expect the RBI to disclose whether it will shift its stance in response to the new data, or whether it will defend its forecast as an “upper‑bound” to maintain prudence.

In Summary

The SBI report suggests that India’s inflation is likely to be lower than the RBI’s own projections for the next two years, citing a more favorable food‑price trajectory and a rebound in global commodity markets. While the RBI remains committed to its current policy stance, the divergence underscores the need for a flexible approach that balances inflation‑targeting goals with growth support. Investors, corporates, and households alike will be watching the RBI’s next Monetary Policy Statement closely to gauge whether the Bank will adjust its rate trajectory in light of the new outlook.