Greater confidence of inflation aligning with target over 12 months: RBI

Central bank's outlook for the Indian economy remains promising in 2025-26, supported by revival in consumption demand, government capex

With recent prints of headline consumer price inflation remaining “benign”, there is a greater confidence that it will converge to the target of 4 per cent over 12 months, said the Reserve Bank of India (RBI) in its annual report for 2024-25 on Thursday.

 

The outlook for the economy is promising but growth needs monetary support, it said. “The benign inflation outlook and moderate growth warrant monetary policy to be growth-supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions.”

 

 

 

Headline inflation is projected at 4 per cent for FY26 while gross domestic product growth is seen at 6.5 per cent. The RBI’s six-member monetary policy committee has since February reduced the policy repo rate by a cumulative 50 basis points while changing the stance to accommodative in the April policy, indicating the central bank’s growth focus.

 

 

“The outlook for the Indian economy remains promising in 2025-26, supported by revival in consumption demand, government’s continued thrust on capex while adhering to the path of fiscal consolidation, healthy balance sheets of banks and corporates, easing financial conditions, continuing resilience of the services sector and strengthening of consumer and business optimism, besides sound macroeconomic fundamentals.” Alongside, the report cautioned about uncertainty around global trade post-protectionist measures, protracted geopolitical tensions and global financial market volatility, which pose downside risks to the growth outlook and upside risks to the inflation outlook. 

 

“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,” it said.

   

The report said Indian banking is resilient but global uncertainties underscore the importance of proactive risk management. “Considering the dynamic nature of the interest rate risk, banks need to address both trading and banking book risks, especially in light of moderation in NIM (net interest margin).”

 

The central bank observed that despite some moderation, non-banking financial companies remain dependent on banks for funding, underscoring the need for greater diversification of their funding sources. “Scale-based regulatory framework is expected to further improve governance and risk management,” it said.