RBI revises FY26 GDP growth forecast to 7.3%: Here’s what influenced the central bank to raise its projection

Led by Governor Sanjay Malhotra, the Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday, December 5, unanimously voted to cut the repo rate by 25 basis points to 5.25%, with immediate effect.

With Friday’s reduction, the committee has now delivered a cumulative 125 basis points of rate cuts in the current fiscal year. Following its December 3–5 meeting, the MPC unanimously voted to cut the repo rate, citing easing inflation and the strong economic growth recorded in the second quarter of FY26.

The real gross domestic product (GDP) registered a six-quarter high growth of 8.2% in Q2 FY26, underpinned by resilient domestic demand amidst global trade and policy uncertainties, the central bank noted. On the supply side, real gross value added (GVA) expanded by 8.1%, aided by buoyant industrial and services sectors.

Last week, the National Statistics Office said real gross domestic product (GDP) rose to ₹48.63 lakh crore in Q2 from ₹44.94 lakh crore a year earlier, while nominal GDP grew 8.7% to ₹85.25 lakh crore.

Unveiling the December monetary policy, Reserve Bank Governor Sanjay Malhotra said economic activity during the first half of 2025-26 benefited from income tax and Goods and Services Tax (GST) rationalisation, softer crude oil prices, front-loading of government capital expenditure, and facilitative monetary and financial conditions supported by benign inflation.

The central bank further said that high-frequency indicators suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in a few leading indicators. GST rationalisation and festival-related spending supported domestic demand during October-November.

“Rural demand continues to be robust while urban demand is recovering steadily. Investment activity remains healthy, with private investment gaining steam on the back of expansion in non-food bank credit and high capacity utilisation,” RBI said in its statement.

India’s merchandise exports declined sharply in October amid subdued external demand, accompanied by softer services exports.

Further, on the supply side, the country’s agricultural growth was supported by healthy Kharif crop production, higher reservoir levels and better Rabi crop sowing. RBI also noted that the manufacturing activity continues to improve, and the services sector is maintaining a steady pace.

RBI said looking ahead, domestic factors like healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions should continue to support economic activity.

Taking all these factors into consideration, the RBI has revised the GDP growth projection to 7.3% for 2025-26 from its earlier projection of 6.8%. It sees Q3 GDP growth at 7% and Q4 at 6.5%.

The central bank also projected real GDP growth for Q1 FY27 at 6.7% and Q2 at 6.8%.

This week, ahead of RBI decision, Fitch Ratings had also raised India's GDP growth forecast for the current fiscal to 7.4%, from 6.9%, on increased consumer spending and improved sentiment boosted by GST reforms.

The International Monetary Fund (IMF) has projected India to grow at 6.6% in FY 2025-26, followed by 6.2% the next year.