MUMBAI: The Reserve Bank of India (RBI) on Friday revised its retail inflation forecast for the financial year 2026-27 upward to 5.1 per cent from the earlier estimate of 4.6 per cent, citing mounting input costs driven by the pass-through of elevated global energy prices to domestic petrol and diesel rates.

Announcing the outcome of the Monetary Policy Committee (MPC) meeting, RBI Governor Sanjay Malhotra highlighted that the revision reflects the impact of ongoing geopolitical uncertainties, particularly the conflict in West Asia, which has disrupted supply chains and pushed crude oil prices higher. The MPC kept the key repo rate unchanged at 5.25 per cent for the third consecutive time while maintaining a neutral stance.

Quarterly projections for CPI inflation in FY27 were set at 4.2 per cent in Q1, 5.1 per cent in Q2, 5.9 per cent in Q3, and 5.4 per cent in Q4, with risks evenly balanced. Core inflation (excluding food and fuel) was also raised to 4.7 per cent from 4.4 per cent earlier. The central bank noted that higher prices of commercial LPG, base metals, plastics, rubber, and other inputs, alongside wholesale price inflation exceeding 8 per cent in recent readings, are contributing to broader price pressures.

The upward revision comes as global crude oil prices remain volatile due to tensions in the Middle East, including risks to key trade routes like the Strait of Hormuz. Domestic fuel prices have already seen adjustments, transmitting cost increases to transportation, manufacturing, and household budgets. Economists warn that sustained high energy costs could add up to 36 basis points or more to headline inflation.

In tandem with the inflation outlook, the RBI lowered its GDP growth projection for FY27 to 6.6 per cent from 6.9 per cent, pointing to adverse spillovers on economic activity from elevated energy prices and global supply constraints. Despite resilient domestic demand, incipient signs of moderation in some sectors were flagged. Governor Malhotra emphasised that while headline inflation remains within the 2-6 per cent target band, with 4 per cent as the medium-term goal, vigilance is required against weather-related risks such as a potentially sub-normal monsoon.

The MPC’s decision underscores a cautious approach amid a complex global environment. A weaker rupee, hovering near record lows, and capital outflows have added layers of complexity. The central bank announced measures like full hedging facilities for certain deposits to bolster forex reserves.

Analysts suggest the revised forecasts signal a delicate balancing act for policymakers. Higher inflation could moderate consumption and investment if not contained, while tighter financial conditions might weigh on growth. Household inflation expectations have also edged up, according to recent RBI surveys.

This policy review serves as a reality check for the Indian economy, which continues to navigate post-pandemic recovery amid external headwinds. The RBI reiterated its commitment to price stability while supporting growth. Markets will closely watch upcoming data on inflation prints, monsoon progress, and global oil dynamics for further cues. Experts believe sustained policy vigilance will be key to steering the economy through these uncertainties.