RBI raises Q1, Q2 FY27 growth outlook, pegs retail inflation for 2025-26 at 2.1%

India’s economy is expected to grow 7.4% in the current financial year, supported by private consumption and investment, even as weak external demand continues to weigh on growth, RBI Governor Sanjay Malhotra said on Friday.

“The Indian economy continues on a steady improving trajectory, with real GDP poised to register significantly higher growth of 7.4% this year as compared to the previous year,” Malhotra said while announcing the final bi-monthly monetary policy for 2025-26.

This is the first monetary policy review after Finance Minister Nirmala Sitharaman announced the Budget for financial year 2026-27.

Malhotra said private consumption and fixed investment supported growth, but external demand “remains the drag, with imports outpacing exports”.

The real gross value added (GVA) growth is estimated at 7.3%, led by services and a revival in manufacturing.

“Going forward, economic activity is expected to hold up well in the next year,” the governor said.

He said agricultural activity would be backed by “healthy reservoir levels, robust rabi sowing and improvement in crop vegetation conditions”, while better corporate performance and sustained momentum in the informal sector should support manufacturing.

The governor said momentum in private consumption is expected to sustain next year, with rural demand steady due to improving farm activity and labour market conditions.

“Recovery in urban consumption should further strengthen, with continued support from GST rationalisation and monetary easing, among others,” he said.

High capacity utilisation, accelerating bank credit, favourable financial conditions and the government’s continued focus on infrastructure are likely to boost investment activity, Malhotra added.

He said the recently concluded India-EU FTA and the prospective India-US trade deal, along with other agreements, “will support exports over the medium term”, while services exports should remain resilient.

Taking these factors into account, the Reserve Bank of India (RBI) has revised upward its real GDP growth projections for the first two quarters of 2026-27 to 6.9% and 7%, respectively.

“The risks are evenly balanced,” Malhotra said.

However, he added that full-year growth projections for 2026-27 have been deferred to the April policy as a new GDP series is due later this month.

Inflation projections

Malhotra said headline CPI inflation remained low in November and December, though it firmed up by one percentage point over the two months, largely because of lower deflation in food crops.

“Excluding gold, core inflation remains stable at 2.6% in December,” he said.

Food supply prospects remain bright on the back of kharif production, adequate buffer stocks, favourable rabi sowing and sufficient reservoir levels, the governor noted.

He said core inflation, barring volatility from precious metals, is expected to stay range-bound.

He cautioned that unfavourable base effects from the sharp fall in prices in the fourth quarter of last year would lead to an uptick in year-on-year inflation in the current Q4.

“Considering all these factors, CPI inflation for this year is now projected at 2.1%, with Q4 at 3.2%,” Malhotra said, adding that CPI inflation for Q1 and Q2 of 2026-27 is projected at 4% and 4.2%, respectively.

Malhotra said the RBI will present full-year inflation projections for 2026-27 in the next policy statement, following the release of the new CPI series on February 12.