RBI's Shock Inflation Cut: 2% Forecast! Is Your Money Safe? Major Economic Shift Ahead!

The Reserve Bank of India (RBI) has significantly revised its inflation outlook downwards, projecting Consumer Price Index (CPI) inflation to reach 2 percent for the current fiscal year, a notable decrease from the earlier projection of 2.6 percent. This adjustment was announced by Governor Sanjay Malhotra during the recent monetary policy review.

Revised Inflation and Economic Projections

The central bank's updated forecasts indicate a substantial moderation in price pressures. The inflation projection for the third quarter (Q3) of the current fiscal year was revised to 0.6 percent from 1.8 percent, while the fourth quarter (Q4) projection stands at 2.9 percent, down from 4.0 percent.

Looking ahead, the inflation estimate for the first quarter (Q1) of the next fiscal year is now seen at 3.9 percent, revised from 4.5 percent. The projection for the second quarter (Q2) of the next fiscal year is set at 4 percent.

Factors Driving Downward Inflationary Trends

Governor Sanjay Malhotra emphasized that core inflation, despite recent steady rises, has shown signs of easing in Q2 and is expected to remain anchored. He also noted that downward pressure on inflation is further reduced due to the softening of precious metal prices. The rationalization of Goods and Services Tax (GST) has been credited with supporting festive demand this year, while the swift conclusion of international trade agreements is anticipated to bolster growth prospects.

"Inflation is likely to be softer than what was projected in October," stated Governor Malhotra, underlining the improved price stability outlook.

Record Low Retail Inflation in October

Supporting the revised forecast, India's retail inflation eased sharply to a record low of 0.25 percent in October, marking its lowest level in the current series that began in 2013. This decline from 1.44 percent in September was primarily driven by a continued fall in food prices. The food index plummeted to -5.02 percent in October from -2.3 percent in the previous month, reflecting broad-based softening across key staples and edible items.

Economic Growth Outlook

In addition to managing inflation, the RBI also revised its Gross Domestic Product (GDP) forecast. The central bank raised the FY26 GDP forecast to 7.3 percent, indicating a positive outlook for economic expansion.

Importance of the Event

This significant downward revision in inflation projections provides the RBI with greater flexibility in its monetary policy. Lower inflation reduces pressure to tighten monetary conditions, potentially allowing for policy adjustments that could support economic growth without encouraging inflation. The increased GDP forecast further reinforces a positive economic sentiment.

• Impact Rating: 8/10

Difficult Terms Explained

• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated through surveys that track the prices of thousands of items. CPI inflation indicates the rate at which these prices are changing.
• Core Inflation: This refers to the inflation rate of goods and services excluding volatile components like food and energy prices. It provides a clearer picture of underlying inflationary pressures in the economy.
• Monetary Policy: Actions undertaken by a central bank, like the RBI, to manipulate the money supply and credit conditions to stimulate or restrain economic activity. This includes setting interest rates.
• Gross Domestic Product (GDP): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. It is a broad measure of a nation's overall economic activity.
• Fiscal Year (FY): A period of 12 months, usually over which a company or government plans its budget or accounts for its income and expenditure. In India, it runs from April 1 to March 31.
• Goods and Services Tax (GST): A consumption tax levied on the supply of goods and services. It has replaced multiple indirect taxes in India and aims to create a common national market.