Your expectation of inflation matters. It is your view that plays a significant role in determining borrowing rates. The Monetary Policy Committee of the Reserve Bank of India takes note of the regular household inflation expectations surveys conducted by its field team. However, there is no harmony in the way households view inflation. A study published in the latest RBI monthly bulletin explains the trend in household inflation expectations. It reveals that men aged 45 and above, as well as self-employed and daily workers who tend to operate on variable incomes, usually exhibit higher inflation expectations. That is primarily because of access to real-time prices for input costs incurred or labour paid.
However, if you are a salaried individual or a young person, the RBI analysis reveals that your social and financial network influences your perception of inflation. That means your reading habits on financial matters, whether through newspapers or social media, impact the way you view the inflation rate. Macroeconomic shocks, such as volatility in food prices, drive household views on inflation over the year ahead. There are emotions and biases involved in forming that view, too, the study finds.
The RBI attaches considerable significance to your expectations regarding inflation. Your decision to adjust your spending has a significant impact on the economy's consumption. Consumption accounts for two-thirds of India's gross domestic product. If you cut your spending due to inflation fears, it reduces the demand for goods and services and could potentially induce a slowdown. While the economic growth momentum is not the primary responsibility of the RBI, the future trend in inflation matters for interest rates. If your fears of inflation are high, interest rates are likely to remain high. The latest report shows a declining trend in the household inflation expectations.
India Ratings, an affiliate of the global ratings agency FITCH, expects retail inflation to average 3% in 2025-26. That is much lower than even the Reserve Bank of India's forecast of 3.7% for 2025-26. The agency expects the RBI to continue lowering borrowing rates.
Despite all the uncertainty, global commodity prices remain stable, indicating a benign trend ahead. The progress of the monsoon in the country is regular, which is good news for food grain and vegetable production and prices. The government has also resorted to adjusting imports and exports of key food products in situations of a price surge.
What it means
If you are a risk-averse investor looking at fixed income investments, you may want to consider fixed deposits. Rates are likely to trend down. You may want to allocate more resources to active debt mutual funds, where fund managers can generate a positive return in the short term as repo rates fall. For those who invest in equity markets, it is essential to know that when interest rates trend downwards, equity prices tend to become more attractive.
As inflation eases and interest rates decline, companies can further strengthen their balance sheets. The trend in the stock market is linked to profit growth. As of 2025, share prices have remained flat, having rallied significantly in anticipation of the present profits. Going forward, profit growth is likely to remain muted, according to most analysts. The urban demand remains tepid despite lower inflation, according to companies announcing quarterly financial results and focusing on the Indian consumer market.
A low-inflation and interest-rate regime is a good time to assess your savings and investments. You must discuss this with your financial advisor. If you do not have one, it may be a good time to find one. Your asset allocation plan requires you to understand your risk tolerance and make an appropriate allocation to equity assets. When interest rates are low, the returns on fixed deposits will tend to decline.