Indian economy: strong growth outlook as inflation hits lows

What the RBI Governor said in the December Bulletin

Reserve Bank of India (RBI) Governor Sanjay Malhotra said the Indian economy has shown resilience despite an “unfavourable and challenging” global environment and is “poised to register robust growth.” In the RBI’s December Bulletin, Malhotra linked the central bank’s stance to the inflation backdrop, saying the “headroom provided by the inflation outlook has allowed us to remain growth-supportive.” He added that the RBI would continue to meet the productive requirements of the economy proactively while ensuring macroeconomic stability.

A look back at 2025: growth, inflation, banking and regulation

Reflecting on an “eventful and challenging” 2025, Malhotra said there was reason for satisfaction. He pointed to robust growth and benign inflation, a banking system that “further consolidated,” and a regulatory framework refined to strengthen the financial system, enhance ease of doing business, and improve consumer protection. He also said India was entering the new year “with hope, vigour and determination” to support economic momentum and accelerate progress.

Rapid disinflation after the October policy review

The December Bulletin highlighted a sharp fall in inflation since the October monetary policy review. For the first time since the adoption of the flexible inflation targeting (FIT) framework, average headline inflation for a quarter fell below the lower tolerance threshold. Average headline inflation came in at 1.7% in Q2 of 2025-26, breaching the 2% lower bound around the 4% target. Inflation moderated further to 0.3% in October 2025.

Growth data: Q2 GDP at 8.2% as demand held up

On the growth front, the RBI Governor noted that real GDP expanded 8.2% in the second quarter. He attributed the strength to festive-season spending, supported in part by rationalisation of goods and services tax (GST) rates. Malhotra also described the combination of “inflation at a benign 2.2%” and “growth of 8.0%” in the first half of 2025-26 as “a rare Goldilocks period.”

What the RBI flagged for 2026: uncertainty outside, resilience at home

In its March 2026 Bulletin, the RBI flagged a complex environment with rising global uncertainty alongside sustained domestic resilience. It said second advance estimates indicate GDP growth for 2025-26 remains robust, driven by strong domestic demand. The RBI added that high-frequency indicators suggested economic activity gained momentum in February, supported by both urban and rural consumption, with record agricultural output, strong automobile sales, and steady services activity cited as signs of traction.

Financial conditions: liquidity comfortable, but markets face shocks

The March 2026 Bulletin said system liquidity remained “comfortable,” aided by government spending and RBI measures, while bank credit and deposit growth continued at double-digit rates. At the same time, it noted global shocks spilling into domestic markets. The RBI said the Middle East conflict contributed to firmer yields on dated government securities, while equity markets corrected and the rupee came under pressure amid foreign portfolio outflows.

External balance and reserves: trade deficit up, buffers adequate

On the external front, the RBI said India’s current account deficit widened marginally, largely because of a higher merchandise trade deficit. It noted imports, particularly petroleum products and gold, increased significantly. Even so, the RBI said India’s foreign exchange reserves remain adequate to provide a cushion against external shocks.

What Deputy Governor Poonam Gupta said about resilience and stability

RBI Deputy Governor Poonam Gupta said India is now more resilient to internal and external shocks, supporting macroeconomic stability and an improving growth trajectory. In a foundation day lecture delivered at the Centre for Development Studies in Thiruvananthapuram on February 20, she described a “virtuous cycle of accelerated growth and macroeconomic stability.” Over four decades of performance, Gupta said average GDP growth rose to 7.7% between FY23 and FY26 from 6.6% in the previous decade. She also said India’s share in the global economy rose three-fold to 3.5% in 2024 from about 1.1% in 1991.

Banking metrics in focus: capital up, NPAs down

Gupta highlighted improvements in banking sector health, calling them “dramatic.” She said the capital to risk-weighted assets ratio of scheduled commercial banks rose to 17.2% in September 2025, above the regulatory minimum. Asset quality also improved, with the gross non-performing asset (GNPA) ratio declining to 2.1% in September 2025 from 2.5% a year earlier, and well below the 5% seen in the previous two decades. She linked a stronger banking sector and rapid non-banking expansion to favourable conditions for supporting the ‘Viksit Bharat’ 2047 objectives.

Key numbers at a glance

Why these signals matter for policy and markets

Taken together, the bulletins and speeches underline the RBI’s focus on balancing growth support with macroeconomic stability. The unusually low inflation readings cited in the December Bulletin explain why the RBI sees policy “headroom” to remain supportive. But the March 2026 Bulletin’s references to geopolitical risks, bond-yield firming, equity corrections, and pressure on the rupee show how external shocks can quickly feed into financial conditions, even when domestic demand indicators remain steady.

Conclusion

RBI officials are projecting resilience in growth amid an uncertain global backdrop, supported by low inflation, domestic demand, and stable financial conditions. The RBI has signalled it will stay proactive in meeting the economy’s productive requirements while building guardrails against external spillovers, with future assessments hinging on evolving global conditions.