NEW DELHI: The Reserve Bank of India (RBI) has presented an optimistic yet cautious assessment of the Indian economy, highlighting a stronger-than-expected growth momentum coupled with a faster-than-anticipated retreat of inflation, which hit a historic low in October. In its latest outlook, the central bank revised its real GDP growth projection for 2025-26 upwards to 7.3 percent, from earlier estimates, while sharply lowering the inflation forecast for the year to 2.0 percent.
Growth engine firing on multiple cylinders
The RBI's confidence stems from a robust 8.2 percent GDP growth recorded in the second quarter (Q2) of FY26—a six-quarter high—powered by resilient domestic demand. RBI governor Sanjay Malhotra, while announcing the monetary policy committee’s decision to reduce the repo rate by another 25 bps, credited a confluence of supportive factors: rationalisation of income tax and GST, softer global crude oil prices, front-loaded government capital expenditure, and "congenial monetary and financial conditions."
According to the governor, high-frequency indicators suggest the momentum persisted into the third quarter (Q3), bolstered by festive spending. Rural demand remains strong, urban demand is in steady recovery, and private investment is gaining traction, supported by high capacity utilisation and expanding bank credit.
"Domestic economic activity is holding up in Q3," Malhotra noted, while flagging emerging softness in a few leading indicators and a sharp contraction in merchandise exports due to subdued global demand.
Looking ahead, the central bank expects healthy agricultural prospects, the ongoing benefits of GST reform, strong corporate balance sheets, and easy financial conditions to continue underpinning growth. It projects GDP growth at 7.0 percent in Q3 FY26 and 6.5 percent in Q4. For the first half of the next fiscal year (FY27), growth is forecast at 6.7-6.8 percent.
Inflation plummets, outlook benign
In a significant development, headline Consumer Price Index (CPI) inflation plunged to an all-time low in October 2025. The decline was led by a correction in food prices, contrary to the typical seasonal trend of high food inflation during September-October.
Core inflation (excluding food and fuel) also remained contained, moderating to 2.6 percent in October if the impact of precious metals like gold is excluded. The RBI noted that the decline in inflation has become "more generalised."
With bright food supply prospects—supported by strong kharif harvests, healthy rabi sowing, and adequate water reserves—and an expected moderation in international commodity prices (excluding some metals), the inflation outlook appears manageable. Consequently, the RBI has projected CPI inflation for FY26 at 2.0 percent, with Q3 at a mere 0.6 percent and Q4 at 2.9 percent. For the first two quarters of FY27, inflation is forecast to rise moderately to 3.9-4.0 percent.
The RBI has characterised the risks to both growth and inflation forecasts as "evenly balanced." On the external front, it acknowledged that global uncertainty, while eased slightly by the end of the US government shutdown and progress on trade deals, remains elevated. Weak global demand poses a downside risk to India's merchandise exports, though services exports are expected to remain strong.
Domestically, the continuation of reform initiatives and a swift conclusion of ongoing trade negotiations present potential upside to growth. The central bank also emphasised that underlying inflation pressures are even lower than the headline numbers suggest, as the spike in precious metal prices has contributed about 50 basis points to the CPI.
