RBI MPC slashes FY26 inflation to 2.6% as GST cuts, food prices drive major cooldown

The Reserve Bank of India’s Monetary Policy Committee (MPC) has sharply reduced its inflation forecast for FY2026 to 2.6%, down from 3.1%, citing GST rate cuts, improved food supply, and easing price pressures. The committee held the repo rate steady and maintained a neutral stance, signaling flexibility amid global volatility.

RBI governor Sanjay Malhotra said the inflation outlook has “turned even more benign” in recent months. “A sharp decline in food prices and the rationalisation of GST rates” contributed to the downgrade, he noted.

The quarter-wise estimates reflect continued softness in prices, with inflation projected at 1.8% for Q2 and Q3, before rising to 4.0% in Q4. While inflation ticked up to 2.07% in August from an eight-year low of 1.55% in July, it remains well within the RBI’s 2–4% tolerance band.

Despite the improved domestic picture, the RBI flagged significant external threats, including geopolitical tensions, tariff disruptions, and volatile crude oil prices. According to its July Bulletin, a 10% rise in global oil prices could push up headline inflation by 20 basis points. The central bank stressed the need for a shift to alternative fuel sources to reduce inflationary risks from import dependency.

The RBI reiterated its commitment to managing liquidity to ensure credit flow to productive sectors and noted that FY26 inflation will also benefit from favorable base effects and supply-side easing. Still, it warned that the inflation trajectory remains sensitive to monsoon performance and external shocks.