Full fiscal year inflation rate to undershoot RBI's expectation of 3.7%: FinMin

Ahead of the Reserve Bank of India’s (RBI) August Monetary Policy Committee announcement, the finance ministry’s June Monthly Economic Review stated that the core inflation of the country will remain subdued, as overall inflation remains comfortably below the RBI’s 4% target. The ministry stated that this makes room for an easing cycle to be sustained.

“Core inflation remains subdued, and overall inflation is comfortably below the RBI’s 4% target, affording room for the easing cycle to be sustained. It appears likely that the full fiscal year inflation rate would undershoot the central bank’s expectation of 3.7%,” the review said.

Retail inflation, measured by the Consumer Price Index (CPI), dropped to a 76-month low of 2.1% in June. The RBI has projected headline inflation at 3.4% for the second quarter of FY26, while actual inflation in Q1 came in lower than the central bank’s internal target. With price pressures easing, full-year inflation is expected to fall below the RBI’s forecast of 3.7%.

“With inflation remaining within the target range and monsoon progress on track, the domestic economy enters the second quarter of FY26 on a relatively firm footing,” the review said.

A major factor aiding the soft inflation trend is the expected decline in global crude oil prices, following a larger-than-anticipated production hike by OPEC+ for August.

On the fiscal front, both Union and state governments have maintained momentum in capital expenditure, even as they adhere to fiscal consolidation targets. Tax revenues continue to grow in double digits, aided by steady consumption and economic activity despite recent tax reductions.

However, credit growth has moderated, suggesting caution among borrowers and tighter risk assessment by lenders. Corporates are increasingly turning to bond markets, particularly through commercial papers, taking advantage of lower borrowing costs.

The report flagged weak private investment as a key concern and underlined the need for corporates to step up spending by leveraging schemes like the Employment Linked Incentive (ELI) to boost job creation and capacity expansion.

“Piggybacking on initiatives like the Employment Linked Incentive (ELI) scheme, it is time for corporates to set the ball in motion,” it added.

Despite a stable domestic outlook, the report cautioned about downside risks. Slowing global growth, including a 0.5% contraction in the US economy in Q1 2025, could weigh on India’s export performance. Uncertainty over US tariff policy may further disrupt trade. In addition, a deflationary trend in wholesale prices could suppress nominal GDP growth, even if real growth remains steady.

Nonetheless, India’s economic fundamentals remain resilient. Over the medium term, the focus must shift to securing a strategic position in global supply chains, particularly in sectors like semiconductors, rare earths, and magnets, to sustain long-term growth.

“The economy has the look and feel of “steady as she goes'" as far as FY26 is concerned. In the medium term, given the ongoing momentous shifts in global supply chains in the areas of semiconductor chips, rare earths and magnets, India has its task cut out,” the report concluded.