Despite rising geopolitical tensions and increasing trade-related uncertainties across the world, the Indian economy remains on a strong footing with robust growth and subdued inflation, Reserve Bank of India Governor Sanjay Malhotra said on Friday.
Presenting the first monetary policy of calendar year 2026, Governor said India has weathered global headwinds better than many peer economies and continues to benefit from strong domestic demand, resilient services activity and improving manufacturing performance. “Amid heightened geopolitical tensions and elevated uncertainty, the Indian economy is in a good spot with strong growth and low inflation,” he said, adding that inflation remains below the tolerance band and its outlook continues to be benign. The Monetary Policy Committee of the RBI on Friday kept the main policy rate – Repo rate – unchanged at 5.25 per cent and raised the GDP growth forecast by 10 basis points to 7.4 per cent for FY2026.
Growth momentum
The Governor noted that high-frequency indicators point to a continuation of strong growth momentum in the third quarter of 2025-26 and beyond. Recent trade developments, including the signing of a landmark free trade agreement with the European Union and a trade deal with the US, are likely to sustain growth momentum over a longer period by supporting exports and investment.
He said recovery in urban consumption should further strengthen with continued support from GST rationalisation and monetary easing among others. High capacity utilisation, accelerating bank credit, conducive financial conditions and government’s continued emphasis on infrastructure should give an impetus to investment activity.
Moreover, several measures announced in the Budget should be conducive for growth, he said.
At the global level, the Governor observed that growth is expected to be marginally stronger in 2026 than earlier projected, aided by technology-led investments, accommodative financial conditions and large-scale fiscal stimulus. However, he cautioned that escalating geopolitical frictions and rising trade tensions are beginning to unravel the existing world economic order. Inflation trends remain uneven across countries, staying above targets in most advanced economies, which has led to divergence in monetary policy actions as central banks approach the end of their easing cycles.
External headwinds
Turning to the domestic outlook, the Governor said real GDP growth is expected to remain resilient. As per the First Advance Estimates, India’s economy is projected to grow by 7.4 per cent in 2025-26, significantly higher than the previous year. Growth has been driven largely by private consumption and fixed investment, even as net external demand remained a drag due to imports growing faster than exports. The MPC also marginally increased the growth forecast to 7.4 per cent from 7.3 per cent for FY2026.
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On the supply side, growth in gross value added has been supported by a strong performance of the services sector and a revival in manufacturing activity, he said. Looking ahead to 2026-27, the Governor said economic activity is expected to hold up well, supported by healthy agricultural prospects, firm construction activity and resilient services demand. High reservoir levels, robust rabi sowing and improved crop conditions are expected to support rural incomes, while improving corporate profitability and sustained momentum in the informal sector should boost manufacturing, he said.
He said private consumption is expected to remain steady, with rural demand supported by improving agricultural activity and favourable labour market conditions. The recovery in urban consumption is also likely to strengthen further with continued policy support and easing financial conditions. Investment activity is expected to gain traction on the back of high capacity utilisation, accelerating bank credit, conducive financial conditions and continued emphasis on public infrastructure spending.
Inflation outlook
On inflation, the Governor said headline consumer price inflation remained low in November and December, even though it firmed up marginally due to a moderation in food price deflation. Core inflation, excluding the impact of gold prices, has remained stable and subdued. The near-term inflation outlook remains favourable, supported by healthy food supply conditions, adequate buffer stocks and favourable crop prospects. However, he flagged risks from geopolitical uncertainty, volatile energy prices and adverse weather events. The MPC marginally raised the inflation forecast to 2.1 per cent from 2 per cent for FY2026.
The MPC revised CPI inflation projections for the first half of 2026-27 to 4.0 per cent in the first quarter and 4.2 per cent in the second quarter, close to the inflation target. The Governor emphasised that underlying inflation pressures remain muted and risks are evenly balanced.
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Malhotra said the Indian economy continues to register high growth despite a challenging global environment. Benign inflation provides policy space to remain supportive of growth while safeguarding financial stability. “We remain committed to meeting the productive requirements of the economy and sustaining the growth momentum,” he said.