India’s growth outlook remains resilient, supported by domestic drivers, despite weak external demand, and is likely to get further support from a favourable monsoon, lower inflation, monetary easing and the salubrious impact of recent GST reforms, the Reserve Bank of India (RBI) said on Wednesday.
Even though the growth projection for the financial year 2025-26 is being revised upwards, “the forward-looking projections for Q3 and beyond are expected to be slightly lower than projected earlier, primarily due to tariff-related developments, despite being partially offset by the impetus provided by the rationalisation of GST rates,” according to the minutes of the Monetary Policy Committee (MPC) meeting held from September 29-October 1, and released by the central bank.
Domestic economic growth was resilient in Q1 2025-26. High-frequency indicators suggest that it is likely to remain strong in Q2. “Thereafter, however, it is expected to soften due to the impact of tariffs, although the GST rationalisation would partially cushion the impact. Several indicators suggest that agricultural prospects are bright in the current year; consequently, rural demand is likely to be buoyant,” according to the MPC minutes.
Strong services sector growth and steady employment conditions would support growth. “External demand, however, is likely to remain lukewarm in the wake of prevailing tariff and trade-related uncertainties. On the whole, growth outcome for 2025-26 is now expected to be higher at 6.8 per cent than 6.5 per cent envisaged in the August policy, even as the outlook from H2 onwards is softer,” the RBI highlighted.
Headline CPI inflation moderated to an eight-year low of 1.6 per cent in July before inching up to 2.1 per cent in August. The decline in inflation was primarily driven by the food component due to improved supply conditions and measures undertaken by the government to manage the supply chain.
In view of GST rationalisation and benign food prices, the projection of headline inflation for 2025-26 has now been lowered to 2.6 per cent from 3.1 per cent projected in the August policy and 3.7 per cent in June. The outlook for inflation in Q1 2026-27 is also benign and has been revised downwards.
“Even though growth is strong by current reckoning, its outlook is softer and is expected to be below our aspirations. The benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth. However, several growth-inducing policies unveiled by the Government and the Reserve Bank should help growth, going ahead,” according to the MPC minutes.
The central bank had kept the policy repo rate unchanged at 5.50 per cent with a “neutral stance”.
