Inflation Forecast for FY26

Inflation is projected to be a significant concern in the financial year 2026, primarily due to escalating raw material costs. A recent DAM Capital report highlights that inflation is expected to decrease to 4.5%, down from current levels, driven by domestic pressures and the pass-through effect of rising costs in agriculture, food, and metals sectors.

External Factors Influencing Inflation

External challenges such as the ongoing tariff war and the depreciation of the Chinese Yuan are expected to exacerbate inflation. The report suggests that the Yuan may face a steeper devaluation compared to the INR, adding pressure to India's inflation levels. Additionally, geopolitical tensions and policies could further complicate the inflation outlook.

Impact on the Indian Rupee

The Indian Rupee is anticipated to depreciate against the US dollar, with projections indicating an average rate of 86.50-87.0 by FY26. This depreciation trend is influenced by the US Federal Reserve's higher interest rates, attracting capital flows into the dollar and widening the gap between Indian and US interest rates.

Monetary Policy Adjustments

The Reserve Bank of India (RBI) is expected to manage this depreciation carefully, possibly through intervention using forex reserves and policy adjustments. The report also mentions that the real effective exchange rate (REER) index suggests the INR is currently overvalued by more than 8%.

Conclusion

Under the new RBI governor's leadership, monetary policy will aim to balance growth with inflationary pressures and the necessity to defend the Rupee. The evolving economic landscape, marked by geopolitical tensions and a global growth disparity favoring the US, underscores the complexity of India's inflation and currency challenges in FY26.