Introduction to RBI’s Upcoming Policy Review
The Reserve Bank of India (RBI) is set to revise its macroeconomic projections in its upcoming policy review. Market participants are divided on the rate outcome, but they unanimously agree that the central bank will raise its growth forecast and lower its inflation projections for FY26. This anticipated revision follows stronger-than-expected GDP growth in the September quarter and a sharper-than-expected moderation in inflationary pressures.
Expected Revisions in Projections
Analysts expect the RBI to reduce its inflation estimate to approximately 1.8-2%, from the current projection of 2.6%, while revising its growth forecast to above 7%, compared with the earlier estimate of 6.8%. The central bank has progressively lowered its inflation forecast for the current fiscal year, while steadily revising its growth projection upward at successive MPC meetings.
Challenges in Inflation Forecasting
According to deputy governor Poonam Gupta, "Inflation forecasting is even more difficult in India due to a large share of volatile food prices in the consumer price index." The central bank revised its FY26 inflation forecast from 4.2% in February to 2.6% in October, and a further reduction is expected. Gupta emphasized the importance of minimizing forecast errors and ensuring that there is no systematic bias in the forecasts.
Reasons for Drop in Inflation
The main reason for the drop in inflation in October to 0.25% – the lowest in the current series – was the continuing drop in vegetable prices for the ninth consecutive month. The GST cuts also helped in bringing down the prices of many commodities within the CPI basket, experts said.
Expectations from Economists
Economists expect a spillover of demand in Q3 from Q2 after GST rates were reduced, with a pick-up seen in credit growth, tax collections, non-oil-non-gold imports, and auto sales. However, headwinds to these are the exports and tariff-related pressures. Indranil Pan, chief economist at Yes Bank, expects the RBI to bring down its inflation forecasts for FY26 to 1.8-2.0%. Sameer Narang, chief economist at ICICI Bank, expects overall growth of 7.5% for FY26, versus the RBI’s projection of 6.8%.
Conclusion
In conclusion, the RBI is expected to revise its macroeconomic projections in its upcoming policy review, with a raise in growth forecast and a lower inflation projection for FY26. The anticipated revisions follow stronger-than-expected GDP growth and a moderation in inflationary pressures. While economists are divided on the rate outcome, they agree that the central bank will make significant changes to its projections. The actual outcome of the policy review will be closely watched by market participants and will have significant implications for the Indian economy.
