RBI Inflation FY2026-27: Malhotra & Co trim FY27 inflation forecast to 5% as easing crude prices offer relief
At its August 2026 review, the Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, trimmed its CPI inflation forecast for FY 2026-27 to 5.0%, citing easing crude oil prices as a relieving factor.
The forecast came with a quarterly breakup and a core inflation estimate of 4.3% for the year.
The repo rate was held unchanged at 5.25%, with the MPC judging that the inflation trajectory did not warrant a rate change at this juncture.
The revision was set against India's statutory inflation-targeting framework, under which the RBI is mandated to keep CPI inflation within a defined band.
Flexible Inflation Targeting (FIT) Framework
India formally adopted Flexible Inflation Targeting in 2016, giving the RBI a single, legally defined nominal anchor for monetary policy in place of the earlier "multiple indicator approach." The framework followed the recommendations of the Urjit Patel Committee (Expert Committee to Revise and Strengthen the Monetary Policy Framework), which submitted its report in January 2014.
Key Details
- Statutory basis: Section 45ZA of the RBI Act, 1934 (inserted by the Finance Act, 2016), under which the Central Government, in consultation with the RBI, notifies the inflation target once every five years.
- Target: CPI inflation of 4%, with a tolerance band of +/-2 percentage points (i.e., 2% to 6%). This target was set for 2016-2021, retained for 2021-2026, and has now been retained again for 2026-2031.
- "Failure" of the target is statutorily defined as average inflation exceeding the upper tolerance limit (6%) or falling below the lower limit (2%) for three consecutive quarters — this triggers a mandatory RBI report to the government explaining the causes and corrective steps.
- The MPC, created simultaneously via Section 45ZB, is the body that operationalises this mandate through the repo rate.
The FY27 inflation forecast of 5.0% sits comfortably within the 2-6% tolerance band, though above the 4% central target — explaining why the MPC retained a "neutral" stance and unchanged repo rate rather than an easing or tightening bias.
CPI Compilation: Methodology and the 2024 Base Year Revision
The Consumer Price Index (CPI) is the price index targeted under the FIT framework and is compiled monthly by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).
Key Details
- CPI is released for three categories — Rural, Urban, and Combined — with the Combined CPI used for the inflation target.
- The base year for the CPI series was revised from 2012=100 to 2024=100, using weights derived from the Household Consumption Expenditure Survey (HCES) 2023-24; the revised series began release from February 2026.
- The revised series expanded the item basket from 299 to 358 items and reorganised the price basket into 12 broader categories (from 6 earlier), aiming to better reflect current consumption patterns.
- By statutory practice, the CPI series itself is now slated for revision every five years going forward.
The FY27 inflation forecast is now being tracked and projected on the new 2024-base CPI series, meaning like-for-like comparisons with pre-2026 inflation data need adjustment for the base-year and weight changes.
Headline vs Core Inflation and the Crude Oil Channel
Headline CPI inflation includes all components, including volatile food and fuel prices, while core inflation strips these out to show the more persistent, demand-driven trend. Global crude oil prices are a key external driver of headline inflation in an oil-importing economy like India, feeding through fuel and transport costs and indirectly into other prices.
Key Details
- Core inflation was projected at 4.3% for FY27, notably below the 5.0% headline figure, indicating that the wedge is being driven by food and fuel components rather than a broad-based demand-side price pressure.
- India imports over 80% of its crude oil requirement, making domestic fuel and transport inflation highly sensitive to global crude price movements.
- Easing global crude prices were cited as a factor allowing the MPC to trim its earlier, higher inflation projection down to 5.0% for FY27.
The gap between headline (5.0%) and core (4.3%) inflation projections illustrates why the RBI monitors both measures — core stability gave the MPC confidence to hold rates even as headline inflation, aided by crude softening, was revised down rather than up.
- FY27 CPI inflation projected at 5.0%, trimmed from an earlier, higher estimate, with quarterly estimates of Q2: 4.7%, Q3: 5.9%, Q4: 5.5%, and Q1 FY28: 5.3%.
- Core inflation for FY27 projected at 4.3%.
- Statutory inflation target: 4% with a +/-2% tolerance band (2%-6%), under RBI Act Section 45ZA, retained for the 2026-2031 period.
- CPI base year revised from 2012=100 to 2024=100, with the new series released from February 2026 using HCES 2023-24 weights.
- Repo rate held at 5.25% at the August 3-5, 2026 MPC meeting, alongside this inflation forecast revision.