Whalesbook
Inflation Forecast Revised Upward
The Reserve Bank of India on Friday announced a marginal upward revision to its inflation projections for the first two quarters of fiscal year 2026-27. Governor Malhotra indicated that elevated precious metal prices are the principal reason for this adjustment, contributing an estimated 60 to 70 basis points to the revised outlook. Inflation is now forecast at 4.0% for the first quarter and 4.2% for the second quarter of FY27.
Underlying Pressures Stable
Despite the upward adjustment driven by precious metals, the central bank emphasized that broader inflationary pressures are expected to remain subdued. Governor Malhotra clarified that core inflation, excluding volatile segments like precious metals, remains stable and the risks are evenly balanced. This assessment is supported by recent data showing headline Consumer Price Index (CPI) inflation, which firmed up by approximately one percentage point over November and December, was largely influenced by a lesser rate of deflation in the food group. In December, core inflation excluding gold held steady at a benign 2.6%.
Base Effects to Influence Near-Term Outlook
While near-term inflation momentum is anticipated to remain muted, the RBI cautioned about potential near-term upticks in year-on-year inflation for the fourth quarter of fiscal year 2025-26. This is attributed to unfavorable base effects, stemming from a significant price decline recorded in the fourth quarter of FY25. Consequently, CPI inflation for the full fiscal year 2025-26 is now projected at 2.1%, with a specific forecast of 3.2% for the fourth quarter.
Market Reaction and Industry Response
The concerns regarding metal prices resonated in financial markets, with the Nifty Metal index trading 0.3% lower at 11,882.30 points on Friday morning. Industry bodies broadly welcomed the RBI's inflation outlook, with the PHD Chamber of Commerce and Industry (PHDCCI) stating that the assessment of benign headline CPI inflation offers comfort to both consumers and producers. They highlighted moderation in food prices, stable core inflation, and adequate buffer stocks as positives for price stability and GDP growth. However, the PHDCCI also echoed the RBI's caution on upside risks from geopolitical tensions and commodity price volatility, stressing the need for continued vigilance.