Assuming a normal monsoon and no further exogenous or policy shocks, the Reserve Bank of India‘s (RBI) structural model estimates indicate inflation will average 4.1% in FY26. Early resolution of geopolitical conflicts, weakening of global demand accompanied by further easing of global food and commodity prices, improvement in supply conditions and proactive supply-side measures by the government could put downward pressure on inflation next fiscal, the RBI said in its latest monetary policy report.
Upside risks to inflation will come from uneven distribution of rainfall, prolonged geopolitical conflicts and resultant supply disruptions, recent uptick in food and metal prices, volatility of crude oil prices and adverse weather events, the central bank said.
Economic growth for fiscal ended March 2026 is expected to ease slightly to 7.1% from 7.2% in the current fiscal, assuming a normal monsoon and no major exogenous or policy shocks.
Robust government capex and revival in private investment, improved prospects of agricultural sector due to favourable monsoon rainfall could provide an upside surprise to growth. The RBI also highlighted strengthening manufacturing and services sector activity sustained by strong domestic demand, among other reasons, that could aid growth.
On the contrary, further escalation in geopolitical tensions, volatility in international financial markets and geoeconomic fragmentation, deceleration in global demand, frequent weather-related disturbances due to climate change and supply chain disruptions could pose downside risks to the baseline growth path, RBI said.Services price and wage inflation could keep global interest rates higher for longer, adversely impacting global growth prospects. Headwinds from prolonged geopolitical and trade tensions, supply chain disruptions and swings in economic policies resulting from impending elections in major economies could also impact global growth.”In case these downside risks materialise, and, if global growth is 100 bps lower than the baseline, domestic growth and inflation could be lower than baseline projections by around 30 basis points and 15 basis points, respectively. If, however, there is faster convergence in global disinflation and alignment in monetary policy paths going forward, recovery in global trade and resolution of geopolitical tensions, there can be an upside to global growth. If global growth is higher by 50 bps, domestic growth and inflation could turn out to be higher by around 15 basis points and 7 basis points, respectively,” RBI said.