Budget 2026: How India’s Inflation Evolved Over the Past Year

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026, a key factor shaping the economic landscape is the evolution of India's inflation rate over the past year. The trends in both retail and wholesale price indices have played a crucial role in shifting policy focus from inflation management to supporting economic growth.

India began fiscal year 2026 with inflation still high because of supply shocks from previous years. However, throughout the first half of the year, there was a steady cooling of price pressures each month. By mid-year, retail inflation had fallen comfortably within the Reserve Bank of India's (RBI) tolerance band and continued to decline, supported by lower food and fuel prices. Wholesale inflation went even further, turning negative as global commodity price corrections translated into lower input and producer prices.

Key Trends in Inflation

The disinflationary trend has been significantly influenced by the cooling of food prices. The Consumer Food Price Index (CFPI) based food inflation saw a sharp decline, reaching its lowest point since October 2021. This decline is attributed to substantial disinflation in vegetables and pulses & products, which carry significant weight in the CPI basket.

Beyond food, other key components of the CPI exhibited mixed trends:

• Housing inflation remained relatively stable.
• Education inflation saw a slight increase.
• Health inflation remained largely unchanged.
• Transport & Communication inflation increased.
• Fuel & Light inflation registered a sharp increase.

The overall decline in headline inflation and food inflation is attributed to factors such as a favorable base effect and decreases in the inflation of vegetables, oils and fats, fruits, pulses and products, cereals and products, eggs, and fuel and light.

RBI's Role and Inflation Targets

The Reserve Bank of India (RBI) has a formal inflation-targeting regime, with a target of 4% CPI inflation, and a tolerance range of 2% to 6%. The effectiveness of this regime has helped lower and stabilize inflation, making it less volatile and improving monetary policy transmission.

Throughout the fiscal year, the RBI has revised its inflation projections downward as price pressures softened. The latest projection estimates FY26 inflation at 2.6%, signaling confidence that headline inflation is stabilizing near the medium-term target. In light of these trends, there has been discussion about the possibility of further policy rate cuts.

Economic Impact and Future Outlook

The moderation of inflation has had a positive impact on the Indian economy. The OECD has maintained India's GDP growth forecast for FY26 at 6.7%, supported by rising real incomes, easing monetary conditions, and strong public capital expenditure. The government expects strong demand, firm public spending, and easing inflation to help India navigate trade uncertainties and sustain growth.

However, there are also potential challenges on the horizon. Concerns remain about the impact of US tariffs on exports. Limited export diversification could intensify the drag from these tariffs, adding downside risk to GDP growth.

Looking ahead, the RBI expects CPI inflation to average around 2% for FY26 and 3.9% for FY27, remaining within its comfort band. The central government's mandate requires inflation to be maintained at 4%, with a ±2% tolerance range.

The evolution of India's inflation rate over the past year has created a supportive environment for economic growth. As the government prepares to present Budget 2026, the focus will likely be on policies that can further boost growth while maintaining price stability.