RBI Inflation FY2026-27: Malhotra & Co raises inflation forecast to 5.2% for FY27

The Reserve Bank of India has revised its inflation forecast for FY27 to 5.2%, from 5.0% earlier, as higher crude oil prices, food costs and a weaker rupee complicate the outlook for price stability.

The Monetary Policy Committee’s latest assessment comes at a time when retail inflation has moved above the RBI’s 4% target, while the escalation in West Asia has created a fresh risk to fuel and imported inflation.

Governor Sanjay Malhotra announced the MPC’s decision on Wednesday, with the inflation outlook emerging as one of the most closely watched parts of the policy review. The central bank has also projected inflation at 4.9%for the second quarter, 6% for the December quarter, Q4 at 5.7% and 5.6% for the June quarter of FY28, with risks evenly balanced.


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Malhotra said the broadening of price pressures was visible in the RBI’s diffusion indices. The weighted share of items with inflation above 4% increased to about 37% in August. He said the near-term inflation outlook pointed to continued supply-side pressures due to a variety of factors, including the monsoon deficit, El Niño conditions and high volatility in international oil prices.

The RBI’s August forecast had pegged FY27 CPI inflation at 5.1%, after it raised the projection from 4.6% at the previous review. The central bank had estimated inflation at 4.2% in the first quarter, 5.1% in the second, 5.9% in the third and 5.4% in the fourth quarter.

The RBI has also raised the repo rate by 25 basis points to 5.50%, marking its first rate hike since February 2023. The move signals a shift in the central bank’s approach as inflation risks have increased, particularly from crude oil and food prices. The RBI had cut the repo rate by a cumulative 125 basis points in 2025 before keeping it unchanged at 5.25% for four consecutive reviews.

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Why the RBI changed its inflation outlook

The RBI’s inflation outlook has become less comfortable as price pressures have started spreading beyond a few individual items.

CPI inflation increased to 4.8% in August from 4.5% in July, with the rise predominantly driven by higher inflation in food and fuel. The RBI noted that core inflation had also picked up, indicating signs of widening price pressures.

The central bank said the weighted share of items in the headline CPI basket recording inflation above 4% had risen steadily to about 37% in August.

The concern, therefore, is not simply whether food inflation remains elevated. The RBI is also watching whether higher input costs and supply shocks start feeding into broader pricing behaviour.

Crude oil has become an important risk.

The re-escalation of the West Asia conflict has triggered sharp volatility in crude oil prices and added uncertainty to India's inflation outlook. Higher energy prices can raise transportation, fuel and production costs and eventually feed into consumer prices.

The RBI also flagged the impact of the deficient south-west monsoon and strong El Niño conditions on agriculture and rural demand.

El Niño can disrupt rainfall patterns and affect agricultural output. A weaker or uneven harvest can push up prices of food items, adding to headline inflation. The RBI, however, said healthy foodgrain buffers and proactive government measures are expected to mitigate some of the impact.

The bigger worry: Will supply shocks become broader inflation?

This is one of the key reasons behind the RBI’s decision to raise rates.

The central bank acknowledged that much of the current inflation pressure is coming from the supply side. Monetary policy cannot directly increase food supplies or bring down global crude prices.

But the RBI said monetary policy can help prevent these temporary shocks from creating second-round effects.

These include higher inflation expectations and changes in the way companies set prices.

The MPC said there was some evidence of elevated inflation expectations and inflation becoming more generalised. However, it also noted that there were only limited signs of supply-side pressures becoming embedded in firms’ pricing behaviour.

This distinction is important.

The RBI is effectively trying to act before a supply shock becomes entrenched across the economy.

What economists expected

The October policy was expected to mark a shift in the RBI’s approach to inflation. In an ET poll of 21 economists and bank executives, 20 expected a 25-basis-point repo rate hike to 5.50%, while one expected the RBI to keep the rate unchanged at 5.25%. The expectations had changed sharply from the August policy, when the MPC had unanimously opted for a status quo and retained its neutral stance.

The call for a rate hike was driven by a combination of higher crude oil prices, rising retail inflation, weaker farm output risks and a narrowing interest-rate differential with the US. Brent crude had risen well above the RBI’s earlier FY27 assumption of $85 a barrel, while August retail inflation had climbed to 4.82% from 4.45% in July. Economists also expected inflation to move above the RBI’s 6% upper tolerance limit in the December quarter. IDFC First Bank, for instance, expected December-quarter inflation at 6.1%, while Bandhan AMC saw it at above 6%.

SBI Research had taken a more cautious view, forecasting CPI inflation at around 5.65% in September and above 6.5% in October and November before easing below 6% in early 2027. It had also expected the RBI to raise its FY27 inflation projection by 20 basis points at the October review.

What global central banks are doing

The RBI’s move also comes as major developed-market central banks have started tightening policy in response to renewed inflation risks. The US Federal Reserve raised its policy rate by 25 basis points in September to 3.75%-4%, saying inflation remained elevated and the move would support a return towards its 2% goal.

The European Central Bank also raised its three key rates by 25 basis points in September, citing inflationary pressures from the Middle East conflict. It raised its 2026 inflation forecast to 3%, from the earlier projection, and said higher energy prices were likely to keep inflation above target into the first half of 2027. The ECB expects inflation to return towards its 2% target only towards the end of 2027.

Japan has taken a similar direction. The Bank of Japan raised its policy rate in September to a 31-year high and Governor Kazuo Ueda has since stressed the need to keep underlying inflation anchored around its 2% target. The BOJ is also assessing the impact of higher raw-material costs, a weak yen and geopolitical tensions, with markets expecting further tightening in the coming months.