The Reserve Bank of India (RBI) on Wednesday highlighted that economic activity has held up strongly at the start of the fiscal year. Real GDP growth in Q1 surprised on the upside, clocking 7.8 per cent, while Gross Value Added (GVA) grew by 7.6 per cent. High-frequency indicators suggest that the domestic momentum is likely to persist into Q2.
RBI Governor Sanjay Malhotra noted that favorable agricultural conditions—including an above-normal monsoon, robust progress of kharif sowing, and ample reservoir levels—are expected to strengthen rural demand.
At the same time, buoyancy in services, steady employment trends, and rationalisation of GST will further support consumer demand. Rising capacity utilisation, easier financial conditions, and improving domestic demand are expected to sustain fixed investment.
However, the Governor sounded a note of caution: ongoing tariff and trade uncertainties, prolonged geopolitical tensions, and volatility in international financial markets constitute key downside risks. He added that structural reforms like GST streamlining may mitigate some external challenges.
Taking into account both the upside momentum and external risks, the RBI has revised its real GDP growth projection for 2025-26 upward to 6.8 per cent. The quarterly breakdown is as follows:
Q2: 7.0 per cent
Q3: 6.4 per cent
Q4: 6.2 per cent
For Q1 of 2026-27, growth is projected at 6.4 per cent, with risks described as “evenly balanced.”
On the inflation front, the Reserve Bank of India (RBI) indicated that outcomes have remained benign, with actual inflation figures substantially below prior projections. This moderation is largely attributed to a sharp decline in food prices and effective government supply chain management. Although price pressures on precious metals persist, core inflation remained contained at 4.2 per cent in August.
The rationalisation of GST rates is expected to reduce prices of several CPI basket items. Accordingly, the RBI has lowered its estimate for average CPI inflation in 2025-26 to 2.6 per cent. The quarterly path envisaged is:
Q2: 1.8 per cent
Q3: 1.8 per cent
Q4: 4.0 per cent
For Q1 of 2026-27, inflation is projected at 4.5 per cent, with risks considered balanced.
On the external front, India’s current account deficit (CAD) narrowed sharply in Q1 2025-26 to US$ 2.4 billion (0.2 per cent of GDP), down from US$ 8.6 billion (0.9 per cent) in the same period last year. This improvement reflects a higher net services surplus and robust remittance inflows. In July–August 2025, services exports, particularly in software and business services, recorded strong growth.
Net Foreign Direct Investment reached a 38-month high in July 2025, while net Foreign Portfolio Investment saw outflows of US$ 3.9 billion so far this year. India’s foreign exchange reserves stood at US$ 700.2 billion as of September 26, sufficient to cover more than 11 months of merchandise imports.
The RBI’s updated projections and commentary point to a cautiously optimistic outlook. The central bank has left room in monetary policy, with low inflation giving it flexibility to respond if growth falters. Nevertheless, several headwinds loom:
Tariff and trade uncertainties could negatively impact export demand
Geopolitical conflicts and global financial market volatility may strain capital flows
Structural constraints in infrastructure, logistics, or supply chains may limit growth potential
Reforms such as a better GST framework, banking sector improvements, and trade facilitation are likely to be critical in bolstering resilience.
In summary, the RBI’s revised macroeconomic outlook paints a hopeful picture for India’s economy in FY 2025-26: “RBI projects 6.8 % GDP growth for 2025-26, inflation expected at 2.6 %.” The strong Q1 performance, combined with favorable agricultural conditions and policy support, underpins this optimism. Yet, the outlook remains tempered by external risks — from trade tensions to geopolitical volatility. Success in sustaining the momentum will depend on steady reforms, effective policy calibration, and vigilance against global headwinds.