Retail inflation in FY26 could undershoot the Reserve Bank of India’s 3.7% projection, the Finance Ministry said in its June economic review.“It appears likely that the full fiscal year inflation rate would undershoot the central bank’s expectation of 3.7%,” the ministry observed.
This in turn could help sustain the rate easing cycle, observes the finance ministry. It says “Core inflation remains subdued, and overall inflation is comfortably below the RBI’s 4% target, affording room for the easing cycle to be sustained,” the ministry noted.
It added that the RBI has projected headline inflation at 3.4% for the second quarter of FY26, while actual inflation in the first quarter came in below its internal target.A key factor supporting the inflation outlook is the expected moderation in global crude oil prices. This comes after a larger-than-anticipated production hike by OPEC+, which increased output by 548,000 barrels per day for August, in addition to earlier hikes.Capex momentum steady, but credit slowsThe report noted that Union and State governments have maintained momentum in capital expenditure while adhering to fiscal consolidation goals. Tax revenues remain buoyant, continuing their double-digit growth trajectory despite recent tax cuts.Also Read: RBI won the battle against inflation, but the war continues: Sanjay MalhotraHowever, credit growth has slowed, reflecting cautious borrower sentiment and a more risk-averse approach by lenders. The ministry also highlighted a growing preference among corporates for bond markets, particularly commercial papers, as lower borrowing costs make them attractive.Time for corporates to step upCalling on private players to do more, the ministry said, “It is time for corporates to set the ball in motion” by tapping into schemes like the Employment Linked Incentive (ELI) to boost investments and job creation.Risks remain despite steady outlookWhile the ministry described the economy as having a “steady as she goes” feel, it flagged several downside risks. A global slowdown, particularly the 0.5% contraction in the US economy in the first quarter of 2025, could weigh on demand for Indian exports. Uncertainty on the US tariff front also poses risks to trade performance.Additionally, slow private investment and the deflationary trend in wholesale prices may impact nominal growth, masking the true pace of economic activity measured at constant prices.Also read: Preferential US tariffs or not, Indian economy needs fresh triggers, says Pankaj MurarkaIn the medium term, the report said India must focus on positioning itself in shifting global supply chains, especially in key sectors such as semiconductors, rare earths and magnets.
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