SBI Research projects FY26 inflation at 3.3-3.5%, below RBI estimate as food prices cool

India’s retail inflation is expected to ease significantly in the current financial year, with the State Bank of India (SBI) Research forecasting average Consumer Price Index (CPI) inflation in the range of 3.3% to 3.5% for FY26, notably below the Reserve Bank of India’s (RBI) estimate of 3.7%. This projection comes against the backdrop of a sharp moderation in price levels, particularly in food categories, and follows an average CPI inflation of 4.6% in FY25.

In its latest Ecowrap report released on Thursday, SBI Research said May 2025 marked a 75-month low in CPI inflation, which cooled to 2.82%, well below both market expectations and the bank’s own estimate. The decline was largely driven by a steep fall in vegetable and pulse prices, down by 13.7% and 8.2% respectively. While fruits, oils, and personal care items continued to witness elevated inflation, the overall basket reflected easing pressures.

The report noted that inflation is likely to remain below 4% through the first three quarters of FY26, potentially rising only in the final quarter. “Given this benign inflation expectations on back of 50 bps rate cut recently in June policy, the current focus of RBI is to support the momentum in capital formation for more durable growth,” the report stated, highlighting the RBI’s recent 50 basis point rate cut as a justified move.

Looking ahead, SBI expects the RBI to maintain a pause on further rate actions until at least December 2025, unless incoming economic data necessitates a shift.

Core inflation, which excludes food and fuel, was pegged at 4.2% in May, the second-highest in 19 months, indicating some persistence in underlying price pressures. However, the report argued that headline inflation could fall below 2% by July 2025 in the absence of renewed food price shocks.

SBI also flagged the need for faster monetary transmission by banks, both in deposit and lending rates, to align with the easing policy stance. “Indian banking is poised for a structural shift, potentially moving towards a developed-market model where deposits are more transactional in nature,” the report added.

The report highlights that the sharp decline in inflation has significantly expanded the central bank’s policy space, offering “ample elbow room” to support growth-oriented measures.

In line with the evolving price dynamics, the RBI has also revised its inflation outlook for FY26. The central bank now projects average CPI inflation at 3.7%, down from its earlier estimate of 4% announced in April. The updated quarterly trajectory is - 2.9% in Q1, 3.4% in Q2, 3.5% in Q3, and 4.4% in Q4, reflecting a gradual build-up in price pressures later in the fiscal year

The report also pointed to a significant fall in inflation across states, with only six states recording CPI above 4% in May 2025, compared to 32 states in October 2024.