In its latest monetary policy review, the Reserve Bank of India (RBI) has projected a strong and resilient growth path for the Indian economy, estimating the Gross Domestic Product (GDP) to expand by 7.3% in the financial year 2025-26. The central bank's assessment points to domestic economic activity holding firm in the third quarter, supported by a mix of consumption and investment, even as a few leading indicators show early signs of moderation.
Domestic Demand and Sectoral Performance
RBI Governor Sanjay Malhotra highlighted that recent economic momentum has been underpinned by robust domestic demand. Festival-related spending and the ongoing rationalisation of the Goods and Services Tax (GST) provided significant support during the October-November period. A notable bright spot is the continued strength in rural demand, while urban consumption is seeing a steady recovery.
On the investment front, activity remains healthy with private capital expenditure gaining momentum. This is being fueled by high capacity utilisation in industries and a consistent expansion in non-food bank credit. The corporate and financial sectors are entering this phase with sound balance sheets, creating a conducive environment for sustained investment.
From a supply-side perspective, agricultural growth is on a positive trajectory, bolstered by healthy kharif crop production, improved reservoir levels, and better rabi crop sowing. The manufacturing sector continues to show improvement, and the services sector is maintaining a steady pace of expansion.
External Challenges and Future Projections
While domestic drivers are strong, the external sector presents a mixed picture. The RBI noted a sharp decline in merchandise exports in October 2024, attributed to subdued global demand. Services exports also exhibited some softening during the period.
Looking ahead, the central bank expects several factors to support economic performance. These include positive agricultural prospects, the continued benefits of GST rationalisation, low inflation, and accommodative monetary and financial conditions. Continued reform measures by the government are also anticipated to provide additional impetus to growth.
On the external front, services exports are projected to remain resilient, though merchandise exports may continue to face headwinds. The RBI acknowledged that global uncertainties remain a key downside risk, but also pointed out that the swift completion of ongoing trade and investment negotiations could unlock upside opportunities.
Quarterly Growth Breakdown and Balanced Risks
The RBI provided a detailed quarterly growth projection. For the current financial year 2025-26, it estimates GDP growth of 7.0% in Q3 and 6.5% in Q4. Looking further into the next financial year, growth for Q1 of 2026-27 is projected at 6.7%, followed by 6.8% in Q2.
The central bank concluded that the risks to this growth outlook are evenly balanced. This assessment reflects a careful weighing of strong domestic fundamentals against potential external shocks and global volatility. The overall message from the monetary policy review is one of cautious optimism, with the Indian economy poised for a robust expansion driven primarily by its internal strengths.
