RBI Annual Report: At GDP Growth Of 6.5%, India To Remain Fastest Growing Major Economy In FY26

The Indian economy is poised to sustain its position as the fastest growing major economy during 2025-26, supported by pickup in private consumption, healthy balance sheets of banks and corporates, easing financial conditions and the government's continued thrust on capital expenditure, the RBI said in its annual report.

The easing of supply chain pressures, softening of global commodity prices and higher agricultural production on the back of a likely above-normal south-west monsoon augur well for the inflation outlook in 2025-26, it said. Financial markets may exhibit sporadic episodes of volatility triggered by turbulent global financial markets in the wake of heightened uncertainty regarding the evolution of trade tariff policies, among others.

Export sector is also expected to encounter some headwinds from rising geopolitical tensions, inward-looking policies and risk of potential tariff-war among major economies. However, India's participation in 14 free trade agreements and six preferential trade agreements, along with the new trade deals under negotiation with the US, Oman, Peru and the European Union may support growth in trade. Resilient services exports and inward remittances are likely to cushion CAD, which would remain eminently manageable in 2025-26.

Manufacturing sector is expected to gain further traction in 2025-26, supported by improvement in domestic demand, higher capacity utilisation, healthy balance sheets of corporates and banks, and consumer and business optimism. The government's focus on widening the manufacturing base and the policy support through the ongoing PLI scheme and National Manufacturing Mission announced in the Union Budget 2025-26 is expected to further strengthen ‘Make in India' initiative.

The construction sector is also expected to continue its robust performance in 2025-26, aided by increased allocation for Pradhan Mantri Awas Yojana. Moreover, the announcement of the second Asset Monetisation Plan (2025- 30), aimed at unlocking Rs 10 lakh crore through asset monetisation, is expected to provide a significant boost to the infrastructure sector.

These factors are expected to create new employment opportunities, improve labour income and strengthen domestic demand. The optimism about manufacturing and services sectors is also reflected in the forward-looking surveys conducted by the Reserve Bank. Taking into account these factors, real GDP growth for 2025-26 is projected at 6.5%, with risks evenly balanced.

Going forward, easing supply chain pressures, softening global commodity prices, expected higher agricultural production supported by above-normal south-west monsoon and elevated reservoir levels augur well for the inflation outlook in 2025-26. The increasing incidence of climate shocks as seen in recent years, however, warrants careful monitoring of food price outlook.

Prolonged geopolitical uncertainties, excessive global financial market volatilities, trade fragmentation and restrictive trade policies pose upward risks to the inflation trajectory. Taking into account these factors, CPI inflation for 2025-26 is projected at 4%, with risks evenly balanced.

With inflation falling below the target in February and March 2025, supported by a sharp fall in food inflation, there is now greater confidence about a durable alignment of headline inflation with the target of 4.0% over a 12-month horizon.

Robust outlook for India's services trade balance and inward remittance receipts is expected to support CAD to remain well within the sustainable limit during 2025-26. Moreover, the inclusion of Indian sovereign bonds in global bond indices and raising the FDI cap in insurance sector to 100% from 74% earlier, as announced in the Union Budget 2025-26, should continue to bolster foreign investment flows.

In the regulatory space, the Reserve Bank would consolidate and streamline regulations to improve business efficiency and simplify compliance. The PRAVAAH17 portal, which was launched in May 2024, has now made mandatory with effect from May 1, 2025, for REs to submit their applications to the Reserve Bank, it said.

It will continue to improve the efficiency and effectiveness of the portal. The Reserve Bank would continue with the supervisory initiatives aimed at early identification of risks and vulnerabilities, increasing the focus on root cause of vulnerabilities, and harmonising the supervisory rigour across various segments of the financial system.

Further, the Reserve Bank would focus on enhancing cyber resilience and capabilities of supervised entities, by implementing recommendations of the inter-regulatory Working Group on uniformity in baseline cybersecurity guidelines of financial entities.