Inflation likely to undershoot RBI's target in FY26: FinMin review

Business Standard

4 days ago

The inflation rate for the full financial year is likely to undershoot the Reserve Bank of India's (RBI's) target of 3.7 per cent, making room for the easing cycle to be sustained, the finance ministry said in its Monthly Economic Review for June 2025 on Monday. However, the review noted that despite monetary easing and strong bank balance sheets, credit growth has slowed, reflecting cautious borrower sentiment and possibly risk-averse lender behaviour.
'The economy has the look and feel of 'steady as she goes' as far as FY26 is concerned,' the review said.
The central bank has projected headline inflation at 3.4 per cent for the second quarter of FY26. Following a larger-than-anticipated production hike by OPEC and its allies, the finance ministry expects global crude oil prices to remain subdued.
'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.
The last time the Consumer Price Index (CPI) reported this mild an uptick was in January 2019 — at 1.97 per cent, according to National Statistics Office (NSO) data.
The review by the Department of Economic Affairs (DEA) in the finance ministry highlighted that slow credit growth and weak private investment appetite may restrict acceleration in economic momentum. It said, 'Piggybacking on initiatives like the Employment Linked Incentive (ELI) scheme, it is time for corporates to set the ball in motion.'
The review noted that continued uncertainty on the US tariff front may weigh on India's trade performance in the coming quarters.
DEA officials wrote in the review that the Indian economy in mid-2025 presents a picture of cautious optimism, amid global headwinds marked by trade tensions and geopolitical volatility.
On the fiscal front, the review observed that revenue sources remain buoyant despite tax cuts, continuing on a double-digit growth path. It said both the Union and state governments have maintained momentum in capital expenditure while adhering to consolidation goals.
Stating the downside risks, the review added that even though geopolitical tensions have not worsened, the global slowdown — particularly in the US, which shrank by 0.5 per cent in Q1 2025 — could dampen further demand for Indian exports. 'Measured in constant prices, economic activity may appear healthier than it is,' the review said.