India’s economy is set for a stable trajectory in fiscal year 2026 (FY26), with retail inflation projected to ease to an average of 4%, down from 4.6% in FY25, as per Crisil’s latest report. Driven by softer food prices, robust agricultural output, and stable global commodity markets, this outlook signals relief for consumers and room for the Reserve Bank of India (RBI) to pursue accommodative monetary policies. This article examines the key drivers behind this promising inflation forecast, supported by insights from leading economic analyses.
A significant factor contributing to the projected decline in inflation is the sharp drop in food prices, which constitute nearly 46% of the CPI basket. According to Crisil, food inflation turned negative at -1.1% in June 2025, down from 1.0% in May, marking the lowest level since January 2019. This deflationary trend is driven by broad-based price reductions in key food categories such as pulses, vegetables, meat, fish, and spices, with cereals also witnessing a sharp easing in inflation. The cost of vegetarian and non-vegetarian thalis dropped by 8% and 6%, respectively, in June, primarily due to lower vegetable and broiler prices, as highlighted in Crisil’s monthly Roti Rice Rate report.
The favorable agricultural outlook further bolsters this trend. The Ministry of Agriculture’s advance estimates indicate a record wheat production in the rabi season, while the India Meteorological Department (IMD) has forecast an above-normal monsoon, with southwest rainfall at 110% of the long-period average as of mid-July 2025. Healthy kharif sowing, supported by these conditions, is expected to sustain food supplies and keep food inflation in check, provided there are no significant weather disruptions.
Subdued Global Commodity Prices
Global commodity prices, particularly for crude oil, are another critical factor in the inflation outlook. Crisil projects Brent crude oil prices to remain subdued at US$ 60-65 per barrel, assuming geopolitical uncertainties do not escalate. This stability is expected to contain non-food inflation, further supporting the overall decline in CPI. Lower input costs, as noted by the Times of India, will also contribute to subdued non-food inflation, reinforcing the positive outlook.
However, potential risks loom on the horizon. Escalating geopolitical tensions, such as the Iran-Israel conflict, could push Brent crude prices toward US$ 80 per barrel or higher, impacting India’s inflation through direct and indirect channels. A US$ 10 increase in crude prices could result in a 25-basis-point impact on inflation, according to CareEdge Ratings. Despite these risks, the current trajectory suggests a manageable inflationary environment, supported by favorable global conditions.
Monetary policy and rate cuts
The moderating inflation trend provides the RBI’s Monetary Policy Committee (MPC) with room to pursue accommodative policies. Crisil anticipates an additional repo rate cut of 50-75 basis points in FY26, following a 100-basis-point reduction already implemented. This follows the MPC’s decision to cut the repo rate by 50 basis points to 5.5% in June 2025, as reported by Business Standard. The RBI’s shift to an accommodative stance, as noted by Nomura, reflects confidence in the inflation outlook aligning durably with the 4% target.
Other analyses, such as those from Barclays and IDFC First Bank, suggest even more aggressive rate cuts, with projections of up to 75-100 basis points in FY26. These cuts are expected to stimulate domestic demand, particularly in discretionary consumption, by lowering borrowing costs. The RBI’s liquidity-easing measures and relaxed regulations for non-banking financial companies are also anticipated to enhance monetary policy transmission, further supporting economic growth.
Economic growth and challenges
While the inflation outlook is positive, India’s GDP growth is projected to remain steady at 6.5% in FY26, according to Crisil, despite global uncertainties such as potential U.S. tariff hikes. Robust domestic demand, driven by strong rural consumption and public investment, underpins this growth. The Union Budget 2025-26’s tax benefits and increased allocations for employment-generating schemes are expected to further bolster private consumption, which accounts for over 55% of GDP.
However, challenges remain. Nomura has downgraded its GDP growth forecast to 5.8%, citing weak urban consumption, uneven rural recovery, and tepid private capital expenditure. Global trade tensions and volatile capital flows could further complicate the growth outlook. Despite these risks, Morgan Stanley’s more optimistic forecast of 6.2% GDP growth highlights the resilience of domestic demand and supportive policies, including continued public and household investment.
India’s inflation trajectory for FY26 is set to be one of moderation, with CPI expected to average 4%, driven by softer food prices, favorable agricultural conditions, and stable global commodity prices. The RBI’s proactive monetary policy, including anticipated rate cuts, will likely support economic growth by fostering domestic demand. While global uncertainties pose risks, the current outlook suggests a balanced and resilient economic environment. As India navigates these dynamics, the interplay of domestic policies and global conditions will be critical in sustaining this positive trajectory.
