Inflation Expected To Stabilise At 4% Target By FY26: RBI Deputy Governor

The deputy governor stated that climate-related supply shocks can contribute to inflation volatility, including food and energy shortages and reduced productive capacity

India's retail inflation is projected to stabilise around the 4 per cent target on a "durable basis" in the financial year 2025-26 (FY26), according to RBI Deputy Governor Michael Debabrata Patra. This statement comes as the government announced that September's Consumer Price Index (CPI) inflation has risen to a nine-month high of 5.49 per cent.

“In July and August 2024, inflation had fallen below the target. It is projected to average 4.5 per cent in 2024-25 before aligning with the target on a durable basis in 2025-26,” Patra made this statement in a speech on inflation targeting, published on Tuesday on the Reserve Bank of India’s (RBI) website.

He noted that India’s situation is distinct because of the persistent shocks to food and fuel prices, which create challenges for monetary policy. In India, price stability is a collective responsibility: the government establishes the inflation target, while the central bank strives to meet it. This framework fosters effective coordination between monetary and fiscal policies without undermining financial stability, fiscal consolidation, or economic growth—potentially offering a model for other countries facing inflationary pressures from supply shocks. Patra also emphasised that central banks will encounter significant challenges in implementing inflation-targeting monetary policy in the coming years, mainly due to climate change.

The deputy governor stated that climate-related supply shocks can contribute to inflation volatility, including food and energy shortages and reduced productive capacity. Additionally, demand shocks may occur due to the loss of wealth among businesses and households resulting from frequent natural disasters.

“These shocks, along with physical and transition risks, can weaken financial institutions and banks, limiting the credit flow to the economy. Climate uncertainty might prompt households to save more, lowering the real equilibrium interest rate. Furthermore, currency depreciation in countries hit by climate disasters can create financial instability, raise import costs, and worsen terms of trade, all of which impact inflation-targeting mandates,” Patra said. 

“These shocks, along with physical and transition risks, can weaken financial institutions and banks, limiting the credit flow to the economy. Climate uncertainty might prompt households to save more, lowering the real equilibrium interest rate. Furthermore, currency depreciation in countries hit by climate disasters can create financial instability, raise import costs, and worsen terms of trade, all of which impact inflation-targeting mandates,” Patra said. 

Central banks, including the RBI, are taking action by promoting green finance, managing climate-related risks, and developing ecosystems for green bonds and climate financing. There is a growing consensus that central banks are positioned to tackle climate change; however, the challenge remains in effectively integrating these issues into inflation-targeting frameworks, he noted.