India could be heading into another year of unusually low inflation, giving policymakers rare breathing room on interest rates, public spending and growth priorities. According to the Economic Survey 2025-26, inflation is expected to remain benign in FY 2026-27 as supply-side conditions improve and the impact of GST rate rationalisation feeds through to retail prices.
Headline inflation has already fallen sharply. In December, CPI inflation averaged 1.3 per cent, staying below the Reserve Bank of India’s tolerance band for the fourth consecutive month. Food prices have been in deflation for seven straight months, led by corrections in vegetables and pulses after a favourable monsoon and improved supply management.
What’s driving the sharp fall in inflation?
The Survey points to three key factors:
1. Food prices under control: Food inflation fell to ~2.71 per cent in December, reflecting better crop output, smoother supply chains and base effects. With allied activities such as livestock and fisheries growing steadily, food-related volatility is expected to remain contained.
2. GST cuts finally reaching consumers: A major shift has been the visible pass-through of GST rate rationalisation. Prices of consumer electronics and automobiles fell by an average of 3.6 per cent between September and December, far sharper than in recent years when tax cuts barely translated into retail price reductions.
3. Benign global inflation environment: IMF projections cited in the Survey suggest India’s inflation may average around 2 per cent in the current year and remain below 4 per cent in FY 2026-27, even as global commodity prices remain broadly stable.
Why the new CPI base matters
From February 12, India will shift to a 2024 CPI base year, with a larger consumption basket and a higher weight for non-food items. The Survey says this will likely dampen food-driven volatility but cautions that inflation trends will need careful interpretation during the transition phase.
Core inflation, in particular, will require close tracking as monetary policy easing continues and global metal prices remain a potential risk.
What this means for RBI rate cuts
With inflation well below target, expectations of further monetary easing are building. The RBI has already cut the repo rate by 125 basis points since early 2025, taking it to 5.25 per cent. Most economists now expect at least one more rate cut in the February policy review after the Union Budget.
A sustained low-inflation environment also lowers borrowing costs across the economy, supporting consumption, housing demand and private investment.
Inflation no longer the main worry
A pre-Budget survey of economists shows a clear shift in concerns. Global uncertainty, including trade protectionism, slowing global growth and geopolitical tensions, has replaced inflation as the biggest risk to India’s outlook.
Corporate sentiment mirrors this trend. More than half of CXOs surveyed expect inflation to stay close to or below the RBI’s 4 per cent target, improving confidence on the cost of capital and investment decisions.
The bottom line
The Economic Survey’s message is clear: inflation is no longer India’s binding constraint. If supply conditions hold and GST reforms continue to pass through, FY 2026-27 could give policymakers a rare window to focus on growth, jobs and external risks, without the usual inflation trade-offs.
Source: News18