Amid escalating global trade tensions and policy uncertainty, the Reserve Bank of India (RBI) on Wednesday revised its GDP growth projection for 2025–26 to 6.5%, marking a 20 basis point reduction from its earlier estimate of 6.7%. The RBI has also projected retail inflation at 4% for FY26, assuming a normal monsoon.
The RBI's Monetary Policy Committee (MPC) announced a 25 basis point reduction in the policy rate, bringing it down to 6%. However, the reduction in the repo rate did not enthuse the equity market, as benchmark Nifty started trending lower immediately after the announcement. Nifty was trading at 22,383, down 0.7% from the previous day's close.
This comes on the heels of the implementation of reciprocal tariffs by US President Donald Trump, which included a hefty 104% levy on Chinese imports.
RBI Governor Sanjay Malhotra, in his policy speech, noted that heightened global uncertainty is dampening investment and consumer spending, both globally and domestically. Trade frictions, higher tariffs, and unknowns surrounding export–import elasticities have made it challenging to accurately quantify the adverse impact on growth.
Despite these headwinds, domestic indicators remain robust. Agriculture is expected to perform well due to healthy reservoir levels and a strong Rabi harvest. Manufacturing is showing early signs of revival, and services remain resilient.
Rural consumption healthy, urban spending picks up
On the demand side, rural consumption is healthy, and urban spending is gradually picking up. Investment activity has gained traction, supported by improved corporate and bank balance sheets, infrastructure spending, and favourable financial conditions.
Giving the quarterly growth projection, the RBI Governor predicted Q1 GDP growth at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%.
Noting that headline inflation has moderated, thanks largely to a sharp decline in food prices,
Malhotra projected the Consumer Price Index (CPI) inflation at 4% for FY26, assuming a normal monsoon. Q1 inflation has been pegged at 3.6%, Q2 at 3.9%, Q3 at 3.8%, and Q4 at 4.4%.
The risks to inflation are said to be “evenly balanced”, with potential currency depreciation pushing prices up and global commodity weakness acting as a counterbalance, said the governor.
India's external sector remains stable
According to Malhotra, India's external sector remains stable, with services exports—especially in software and transportation—continuing to perform well. The current account deficit is expected to stay within sustainable limits. While net FDI inflows declined to $1.7 billion in FY25, higher non-resident deposits and external commercial borrowings helped offset the shortfall.
As of April 4, 2025, India's foreign exchange reserves stood at $676.3 billion, providing an import cover of approximately 11 months.
System liquidity, which was in deficit early in the year, has turned into a surplus, aided by the RBI's liquidity operations and increased government spending. As of April 7, 2025, surplus liquidity stood at Rs 1.5 lakh crore. Financial soundness indicators of banks and NBFCs remain strong, with capital buffers well above regulatory norms.
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