In a move reflecting growing confidence in India’s economic stability, the Reserve Bank of India (RBI) has lowered its inflation forecast for the financial year 2025–26 to 3.7%, down from the earlier estimate of 3.8%, while maintaining the country’s economic growth projection at 6.5%. The announcement came at the conclusion of the RBI’s three-day Monetary Policy Committee (MPC) meeting held from June 4–6, 2025, under the leadership of Governor Sanjay Malhotra.

Lower Inflation Amid Favorable Conditions

The revised inflation outlook comes on the back of falling food prices and a favorable monsoon forecast. The RBI anticipates stable inflation around 2.9% in each quarter of FY26, a significant improvement from previous estimates. The central bank cited six consecutive months of declining food inflation, with April 2025 recording a Consumer Price Index (CPI) inflation of 3.2%, the lowest in six years. However, a slight rise in fuel prices, particularly LPG, has been observed.

Steady Economic Growth Expected

Despite global uncertainties, the RBI has kept its GDP growth forecast unchanged at 6.5% for FY26, citing robust domestic demand and steady investment flows. Quarterly projections are optimistic, with growth expected at 6.5% in Q1, 6.7% in Q2, 6.6% in Q3, and 6.3% in Q4.

Strong rural demand, rising urban consumption, and increased infrastructure spending are seen as key drivers of economic expansion. Additionally, new trade partnerships, including the recently signed UK Free Trade Agreement, are expected to support exports and boost investor confidence.

Policy Shift: Repo Rate and Liquidity Measures

In a significant policy move, the RBI cut the repo rate to 5.5%, continuing a rate reduction trend that has brought it down by 100 basis points since February 2025. Alongside this, the Cash Reserve Ratio (CRR) has also been lowered by 100 basis points to 3%, aiming to inject more liquidity into the banking system and support lending.

The central bank also moved away from its accommodative stance, signaling a more neutral approach going forward. This indicates a more cautious outlook, with limited room for further rate cuts in the near future.

Market Reaction and Expert Views

Reacting to the announcement, Divam Sharma, founder of Green Portfolio PMS, described the outlook as “promising,” noting that the larger-than-expected rate cut would help stimulate liquidity and promote corporate investment, especially amid ongoing geopolitical uncertainties.

“This 50 basis point cut, instead of the expected 25 basis points in July, gives the economy a solid boost,” he remarked.

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Balancing Growth and Stability

As inflation continues to trend below the RBI’s medium-term target of 4% and economic activity remains on a steady course, the central bank appears committed to balancing growth with price stability. The decisions taken this month reflect a strategy aimed at maintaining macroeconomic momentum while navigating global headwinds.

The next MPC meeting is scheduled for August 2025, where the central bank will reassess the evolving economic landscape and adjust its policy stance as needed.

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