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India heads into the Union Budget 2026 period with strong GDP growth and inflation well below the RBI’s 4% target.
Low inflation gives the RBI rare flexibility to either hold interest rates steady or go for further cuts in 2026.
Fiscal discipline alongside high capex could support stable monetary policy decisions.
Inflation trends have quietly reshaped India’s economic outlook ahead of Budget 2026. After months of subdued price pressures, retail inflation is now far below RBI’s medium-term target. This reduced price situation gives policymakers room to think not just about firefighting. With growth indicators and stable external balances, experts believe the monetary policy will be more accommodative this year. Let’s take a look at what you can expect from RBI’s monetary policy in 2026.
Government data show that real GDP increased by 8.2% in the second quarter of FY 2025–26. At the same time, growth for the first half of the year stood at 8%. This performance crossed earlier expectations and reflected broad-based expansion in sectors.
Services and industry have led the recovery, supported by resilient domestic demand and improving investment activity. Agriculture, while less dynamic, has offered steady support to overall output.
RBI, in turn, has raised its full-year growth forecast for FY26 to 7.3%. The central bank cited strong consumption, policy support, and macro stability behind this forecast. This growth cushion gives policymakers greater confidence to focus on long-term reforms.
The most striking development ahead of Budget 2026 is the sharp moderation in inflation. Retail inflation has remained subdued for most of FY26, with Consumer Price Index (CPI) inflation rising slightly to 0.71% in November 2025. Even this uptick keeps inflation far below the RBI’s medium-term target of 4%.
The central bank now expects average inflation of around 2% for the full fiscal year. Lower food prices, GST rate rationalisation, and stable global commodity trends have helped anchor headline inflation. While core inflation shows some persistence, overall price pressures look like minimal. This strengthens purchasing power and supports consumption, while also creating space for accommodative monetary policy.
Also Read: GST Reforms vs Inflation: SBI Predicts Price Relief for Indians in FY26 Amid Rising Import Costs
The government still balances consolidation with growth priorities. For FY26, the fiscal deficit target has been set at 4.4% of GDP, at about Rs. 15.69 lakh crore. While the deficit has widened during the year due to a sharp increase in capital expenditure, this reflects a deliberate push to strengthen infrastructure and long-term growth potential.
Data from the Controller General of Accounts show that by October 2025, the fiscal deficit had reached over half of the annual target. However, Finance Minister Nirmala Sitharaman has reinforced confidence in meeting the full-year goal, backed by steady revenue collections and expenditure control. Strong GST and direct tax inflows continue to support the government’s fiscal plans.
The trade deficit widened sharply in April–October 2025. It was driven by faster import growth and a decline in exports. Global uncertainties and high Trump tariffs imposed by the United States have added pressure on trade flows.
Despite this, India’s foreign exchange reserves have offered strength. Reserves rose to over $693 billion by mid-December 2025, providing a buffer against external shocks. It also gave RBI the flexibility needed to manage currency volatility. This external stability reduces risks even as global trade conditions are uncertain.
RBI cut the repo rate by 125 basis points in 2025 to 5.25%. The central bank has further signalled that rates could continue to be low for a longer period if inflation stays under control. Liquidity conditions are expected to be supportive, with additional injections possible to sustain credit growth into 2026.
Union Budget 2026-27 will play a key role in shaping the RBI’s next steps. A growth-friendly Budget that maintains fiscal discipline would boost market sentiments. On the other hand, any inflationary surprises or fiscal slippage could force a reassessment.
Also Read: RBI Monetary Policy: Central Bank Cuts Repo Rate by 25 bps to 5.25% as Inflation Cools
Budget 2026 comes right when the fiscal and monetary policy of India is closely aligned. With inflation sliding to multi-year lows and growth outperforming expectations, India has a rare opportunity to lock in macroeconomic stability. The coming months will reveal whether RBI rates will be cut further, shaping India’s economic trajectory heading towards 2027.
1. Why is Budget 2026 important for the RBI?
The budget 2026 sets the financial framework for the forthcoming fiscal year. Throughout the new fiscal period, if the government maintains fiscal restraint regarding its expenditures and inflation continues to remain low, then the Reserve Bank of India will have an increased ability to manage its interest rate policy without the constant concern of future price shocks or instability in the financial markets.
2. How low is inflation in India at present?
Retail inflation is currently very much below the Reserve Bank of India’s target of 4%, and according to the most recent published data, retail inflation was nearly 1% previously, which is extraordinarily low. This offers policymakers an opportunity to create a favourable environment for stimulating economic growth through a loosening of monetary policy.
3. What does strong GDP growth mean for Reserve Bank of India policy decisions?
Policymakers will be more confident that the economy will be able to tolerate both reforms and policy changes that are made by the Reserve Bank of India due to the positive signs of solid growth in the national economy. Additionally, strong levels of GDP growth will permit the Reserve Bank of India to concentrate on creating long-term stability in the monetary system as opposed to introducing decisions designed for emergencies.
4. Why are foreign exchange reserves important to the Reserve Bank of India?
A large amount of Foreign Exchange Reserves provides a buffer against global shocks and the pressure of currency fluctuations, thereby allowing the Reserve Bank of India to form and manage interest rates and liquidity safely and without fear of sudden outflows of capital or rapid volatility in the value of the indian rupee.
5. Could the Reserve Bank of India cut rates again in 2026?
If Inflation remains low and the Budget for 2026 does not contain fiscal excess, interest rates will likely be lowered again. However, before making any final decision, the Reserve Bank of India will continue to monitor global risk and domestic demand.
