Inflation in India is expected to remain benign in the coming financial year as well, supported by favourable supply-side conditions and the gradual pass-through of goods and services tax (GST) rate rationalisation,
according to the Economic Survey 2025-26, tabled in Parliament on January 29.
India’s inflation dynamics have already softened significantly. In December, headline inflation averaged 1.3 per cent, staying below the Reserve Bank of India’s tolerance band of 2-6 per cent for the fourth straight month. Food prices remained in deflation for the seventh consecutive month, with the December reading at (-)2.71 per cent.
However, the Survey cautioned that underlying price trends still need close tracking.
“The trajectory of core inflation will need to be closely monitored in the context of monetary policy easing and potential upward pressures from global base metal prices,” the Survey said, adding that the shift to a new CPI series would require careful interpretation of price movements.
New CPI base to change inflation assessment
From February 12, India’s CPI series will shift to a 2024 base, featuring an updated consumption basket with more items and a higher weight for non-food components. According to the Survey, this change is expected to help contain food-related volatility, but it will also have implications for how inflation trends are assessed going forward.
Inflation outlook remains comfortable
Citing IMF data, the Survey said inflation is expected to average 2 per cent in the current fiscal and may not exceed 4 per cent in the coming financial year.
The Reserve Bank of India has projected inflation to average 2 per cent in FY26 and 4 percent in the first half of FY27.
GST rate cuts showing visible impact
GST rate rationalisation is already feeding into lower prices. Prices in consumer electronics and automobiles fell sharply between September and December, marking a much stronger pass-through than seen in recent years.
Average prices in these categories declined 3.6 per cent over the September-December period. This contrasts with the same months in 2024 and 2023, when prices barely moved, falling by just 0.3 per cent on average.
Inflation concerns fade, global risks take centre stage
Perceptions around inflation have also shifted. A pre-Budget poll of 20 economists showed that global uncertainty, rather than domestic inflation or fiscal risks, has emerged as the biggest concern heading into the FY27 Budget.
Six respondents cited US and global headwinds as their primary worry, pointing to trade protectionism, slowing global growth and rising geopolitical tensions.
Corporate sentiment mirrors this shift. Over half of CXO respondents expressed confidence that policymakers would keep inflation below the RBI’s 4 per cent target, contributing to a more optimistic outlook for the cost of capital.
More than two-thirds of respondents expect the central bank to cut rates in FY27.
Rate cut expectations build
The RBI has already cut rates by 125 basis points since the start of 2025, taking the policy rate to 5.25 per cent. Economists have pencilled in another rate cut at the February policy meeting, following the Union Budget announcement.
