RBI lowers FY26 GDP growth forecast to 6.5% on global trade uncertainties

Inflation outlook for India improves on sharp decline in food prices and record wheat and pulse production

The Reserve Bank of India (RBI) lowered its gross domestic product (GDP) growth forecast for 2025-26 (FY26) to 6.5 per cent from 6.7 per cent, citing global trade volatility and policy uncertainties. The decision was announced on Wednesday after the Monetary Policy Committee’s (MPC) 54th meeting, chaired by RBI Governor Sanjay Malhotra.

 

Malhotra warned that trade frictions and higher tariffs could impede domestic growth, stating, “Dent on global growth due to trade friction will impede domestic growth also. Higher tariffs shall have a negative impact on net exports.” He said the new fiscal year had begun on an “anxious note” due to rising global trade concerns.

 

 

India’s GDP projections revised downward

The National Statistics Office (NSO) estimates India’s GDP growth at 6.5 per cent for FY25, following 9.2 per cent growth in FY24. For the ongoing financial year, the NSO has also revised its GDP growth projection to a steady 6.5 per cent growth.

 

The downward revision was driven by uncertainties in global trade, a weaker external demand outlook, and potential headwinds from financial market volatility. This comes as the United States' reciprocal tariffs come into effect. Indian imports to the US will now face a 26 per cent tariff. A 25 per cent tariff has been levied on auto and auto part imports, with more tariff announcements expected to follow in the coming days. The tariffs have triggered a trade war between the US and China, while also forcing countries to begin fresh trade negotiations with the Trump administration, disrupting supply chains.  

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Strong balance sheets can spur growth

Despite external challenges, Malhotra expressed optimism, highlighting rural demand recovery, an uptick in urban consumption, government capital expenditure, and strong corporate balance sheets as key domestic growth drivers.

 

As the economy moves forward, the recovery of industrial activity, higher capacity utilisation, and the healthy balance sheets of both corporates and banks are expected to further contribute to growth. While merchandise exports may face challenges due to the uncertain global economic landscape, services exports are expected to remain resilient, providing a buffer against global trade disruptions.

 

On the supply side, agricultural prospects are looking promising, and the services sector is expected to show resilience. Despite this, ongoing global trade disruptions continue to pose risks to the economic outlook, the RBI said.

 

The RBI’s quarterly GDP growth projections for FY26 are:

• Q1: 6.5 per cent (down from 6.7 per cent)
• Q2: 6.7 per cent (down from 7.0 per cent)
• Q3: 6.6 per cent (up from 6.5 per cent)
• Q4: 6.3 per cent (down from 6.5 per cent)

 

India’s inflation outlook strengthens

India’s retail inflation fell to a seven-month low of 3.61 per cent in February 2025, below the RBI’s 4 per cent target for the first time since August 2024. Malhotra credited this to a sharp decline in food prices and record wheat and pulse production.

 

“The outlook for food inflation has turned decisively positive,” Malhotra said. However, he cautioned that global uncertainties and weather-related disruptions could still pose inflation risks.

For FY26, assuming a normal monsoon, the Consumer Price Index (CPI) inflation is now projected at 4 per cent, revised down from 4.2 per cent.

 

Quarter-wise CPI inflation projections:

• Q1: 3.6 per cent (down from 4.5 per cent)
• Q2: 3.9 per cent (down from 4.0 per cent)
• Q3: 3.8 per cent (unchanged)
• Q4: 4.4 per cent (up from 4.2 per cent)

 

RBI MPC cuts repo rate

The MPC unanimously voted to reduce the repo rate by 25 basis points (bps) to 6 per cent, effective immediately. The decision aligns with the RBI’s neutral policy stance, allowing flexibility to adjust rates as needed. This marks the second consecutive rate cut by the RBI. 

 

“We are aiming for non-inflationary growth that is built on improved demand-supply response and sustained macroeconomic balance,” Malhotra said, reaffirming RBI's commitment to supporting growth while maintaining inflation stability.