Key Points:
- RBI projects India will remain the world’s fastest-growing major economy in 2025-26, with GDP growth forecast at 6.5% and inflation at 4%.
- Growth to be driven by strong domestic demand, robust financial sector, and continued government capital expenditure.
- Risks include global trade tensions, geopolitical uncertainties, and supply chain disruptions.
- RBI has cut the repo rate twice recently, shifting to a more growth-supportive monetary policy as inflation cools.
- Service exports, remittances, and new trade agreements expected to help manage current account deficit.
New Delhi: The Reserve Bank of India (RBI) has released its annual report, projecting that India will continue to be the world’s fastest-growing major economy in the financial year 2025-26. The central bank forecasts a robust real GDP growth of 6.5% and expects consumer price index (CPI) inflation to moderate to 4% during the period.
Growth Drivers: Domestic Demand, Capex, and Financial Resilience
According to the RBI, the Indian economy’s positive outlook is underpinned by several key factors:
- Revival in Consumption Demand: Rising private consumption is set to play a central role in sustaining momentum into the next fiscal year.
- Government’s Capital Expenditure Push: Continued focus on infrastructure and public investment, while maintaining fiscal discipline, remains a cornerstone of India’s growth story.
- Healthy Financial Sector: Strong balance sheets among banks and corporates, along with easing financial conditions, are expected to support investment and credit growth.
- Resilient Services Sector: The services sector continues to act as a growth engine, bolstered by growing consumer and business confidence.
- Manufacturing and Agriculture: Initiatives like the National Manufacturing Mission and favorable monsoon forecasts are set to strengthen manufacturing and agriculture, generating employment and supporting rural demand.
Monetary Policy: Supporting Growth as Inflation Cools
The RBI has responded to a benign inflation outlook by cutting the repo rate in two consecutive policy reviews, bringing it down to 6% and shifting its stance to “accommodative”. This marks a proactive move to support growth amid global uncertainties, with inflation forecast to remain within target levels projected at 4% for FY26. The central bank emphasized the need for banks to manage interest rate risks as net interest margins tighten.
Risks and Challenges: Global Headwinds Remain
While the outlook is positive, the RBI flagged several external risks:
- Global Trade Tensions: Protectionist measures, tariff wars, and fragmented trade policies could impact exports and financial market stability.
- Geopolitical Uncertainties: Ongoing conflicts and supply chain disruptions pose downside risks to growth and could exert upward pressure on inflation.
- Climate Challenges: Weather-related shocks remain a concern for both agriculture and inflation management.
External Sector: Trade Agreements and Remittances to Cushion Risks
The RBI highlighted that ongoing negotiations and signing of new trade agreements will help mitigate the impact of global trade uncertainties. Growth in service exports and steady inward remittances are expected to keep the current account deficit “remarkably manageable” in FY26.
Conclusion: India’s Economic Fundamentals Remain Strong
Despite global headwinds, India’s macroeconomic fundamentals, robust financial sector, and policy commitment to sustainable development position it to maintain its leadership as the fastest-growing major economy in 2025-26. The RBI’s annual report underscores a cautious but confident outlook, with the central bank ready to support growth while vigilantly managing emerging risks.
