The Reserve Bank of India (RBI) has stated that while global challenges persist, the Indian economy has demonstrated significant resilience, powered by strong domestic demand and supportive policies. This assessment comes from the central bank's latest State of the Economy report, published in its December bulletin.
Domestic Strength Versus External Challenges
The report highlights a standout achievement: India's GDP growth accelerated to 8.2% in the second quarter of the 2025-26 fiscal year, marking the highest expansion in six quarters. This robust performance is credited primarily to vigorous private consumption and fixed investment. High-frequency indicators for November suggest economic activity remained firm, with urban demand showing particular strength.
However, the RBI cautioned that the economy is not entirely insulated from external pressures. Global trade and policy uncertainties led to foreign portfolio outflows from equity markets. These outflows put downward pressure on the Indian rupee, which subsequently impacted the country's foreign exchange reserves. The report also noted that while the services sector stayed robust, manufacturing displayed early signs of a slowdown.
Monetary Policy and Inflation Landscape
In a supportive move, the Monetary Policy Committee (MPC) unanimously reduced the policy repo rate by 25 basis points to 5.25% in its latest review. This cut brings the total reduction since February 2025 to 125 basis points, aimed at bolstering growth. On the inflation front, the news remains positive. Headline Consumer Price Index (CPI) inflation for November 2025 inched up to 0.71% from 0.25% in October, partly due to vegetable prices, but it stayed comfortably below the RBI's 2-4% target band. Food inflation remained in negative territory for the sixth consecutive month.
The central bank revised its full-year projections, raising the FY26 growth forecast by 50 basis points to 7.3% and lowering the CPI inflation projection by 60 basis points to 2.0%.
Looming Trade Threat from Mexico
A significant external risk flagged by the RBI involves new tariffs from Mexico. On December 11, Mexico imposed higher import duties of 5-50% on 1,400 products from nations without a free trade agreement. Since India lacks such a pact with Mexico, tariffs on key Indian engineering exports are set to rise sharply to 20-50% from January 1, 2026.
This move targets crucial sub-segments where Mexico is a major destination for Indian goods:
- Two and three-wheelers
- Motor vehicles and cars
- Auto components and parts
During FY25, Mexico accounted for 5% to 12% of India's total exports in these sectors, making the potential impact substantial.
Path Forward: Fundamentals and Reforms
Despite the mixed global environment, the RBI's report expresses confidence in India's economic trajectory. It attributes current resilience to coordinated fiscal, monetary, and regulatory policies, alongside strong domestic demand and manageable inflation. The central bank emphasized that a continued focus on macroeconomic fundamentals and deeper economic reforms will be key to unlocking efficiencies and maintaining a high-growth path in a volatile world.
The report also pointed to positive signals in November's economic activity, such as increased e-way bill generation, petroleum consumption, and digital payments, indicating a pickup in goods movement, freight, construction, and agricultural operations.
