After nearly three-and-half years, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) unanimously decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) to 5.50 per cent, in a bid to tame rising inflation amid continuing West Asia crisis. Consequently, the standing deposit facility (SDF) rate stands adjusted at 5.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.75 per cent. The MPC also decided to change the stance to calibrated tightening.
On the inflation front, the near-term outlook on inflation points towards continued pressures from supply side on account of the deficient monsoon, ongoing El Nino conditions and high energy and other commodity prices, the pass through of which is still continuing. CPI inflation is projected to be 5.2 per cent for 2026-27 from 5.0 per cent projected earlier. With this, Q2 inflation forecast raised to 4.9 per cent from 4.7 per cent; Q3 to 6.0 per cent from 5.9 per cent; and Q4 to 5.7 per cent from 5.5 per cent. Inflation for Q1:2027-28 is projected at 5.6 per cent higher compared to 5.3 per cent projected earlier, with risks being evenly balanced. Core inflation is projected at 4.4 per cent for 2026-27 as against 4.3 per cent projected earlier.
CPI inflation increased to 4.8 per cent in August 2026 from 4.5 per cent in July. While the increase has been predominantly on account of higher inflation in food and fuel groups, core inflation has also picked up indicating some signs of widening price pressures. Food price increases have become broader based along with notable spikes in certain items such as sugar and onion. The uptick in fuel inflation in August largely reflected unfavourable base effects. Core inflation increased to 4.2 per cent and core inflation, excluding precious metals, increased to 2.9 per cent in August. The weighted share of items in headline CPI recording inflation above 4 per cent increased steadily to about 37 per cent in August.
On the economy front, real GDP growth for 2026-27 is projected at 7.1 per cent, which is higher compared to 6.7 per cent projected earlier. With this, Q2 growth project at 7.2 per cent from 6.4 per cent earlier; Q3 at 6.9 per cent from 6.5 per cent earlier; and Q4 growth remained at 6.8 per cent. Real GDP growth for Q1:2027-28 is projected at 7.1 per cent, lower compared to 7.3 per cent projected earlier. Continuing momentum in services and broadly stable employment conditions are likely to support urban demand. Strong capacity utilisation, robust credit flows and the government’s thrust on infrastructure are expected to sustain investment activity. While services exports are expected to remain buoyant, bilateral trade agreements should boost merchandise exports.
