Reserve Bank of India (RBI) Annual Report 2025–26

Recently, the Reserve Bank of India (RBI) released its Annual Report for 2025–26, presenting a comprehensive assessment of the Indian economy and the financial system. The report noted that despite persistent global uncertainties arising from the West Asia conflict, elevated energy prices, inflationary pressures, and disruptions in international supply chains, the Indian economy is expected to remain resilient during FY 2026–27. According to the RBI, India's strong macroeconomic fundamentals, prudent policy interventions, and sustained domestic demand provide a solid foundation for maintaining growth momentum in the coming years.

India's Growth Performance Remained Strong

The RBI observed that India continued to be one of the fastest-growing major economies in the world during 2025–26. The country's real Gross Domestic Product (GDP) growth was estimated at 7.3%, higher than the earlier projection of 6.5%.

The growth was broad-based and reflected improvements across multiple sectors of the economy. Private Final Consumption Expenditure (PFCE), which indicates household spending, expanded by 7.7%, highlighting the strength of domestic demand. At the same time, Gross Capital Formation, a measure of investment activity, grew by 6.5%, indicating sustained confidence among businesses and investors.

Among productive sectors, the services sector continued to remain the backbone of the economy, with Gross Value Added (GVA) increasing by 8.7%. The manufacturing sector emerged as a major driver of growth, recording an impressive expansion of 11.5%, its strongest performance in recent years. According to the RBI, this momentum was supported by a revival in manufacturing activities, strengthening rural demand, and gradual recovery in urban consumption.

Inflation Moderated Significantly During the Year

The report highlighted that inflationary pressures eased considerably during 2025–26. The RBI revised its headline Consumer Price Index (CPI) inflation projections downward, from an initial estimate of 4% to nearly 2% by December 2025.

The Monetary Policy Committee (MPC) noted that the moderation in inflation was largely driven by a decline in food prices, which are generally volatile in nature. However, the RBI cautioned that core inflation, which excludes food and fuel components, remained relatively stable at around 4%.

This persistence in core inflation suggested that underlying price pressures still existed within the economy. Consequently, despite the decline in headline inflation, the RBI maintained a cautious approach towards further monetary easing.

Continued Fiscal Consolidation Strengthened Macroeconomic Stability

The Annual Report underscored the government's efforts towards maintaining fiscal discipline and reducing its dependence on borrowings.

The Gross Fiscal Deficit (GFD) declined from 4.8% of GDP in 2024–25 to 4.4% of GDP in 2025–26. The Union Government has further budgeted the fiscal deficit at 4.3% of GDP for 2026–27, continuing the downward trajectory from the pandemic-induced peak of 9.2% of GDP recorded in 2020–21.

The improvement in fiscal indicators was aided by healthy revenue growth. Gross tax revenues increased by 7.4%, supported by robust collections from corporation tax, excise duties, and customs duties. Additionally, non-tax revenues expanded by 24.4%, primarily due to receipts exceeding budgetary expectations.

Importantly, the government continued to prioritise capital expenditure, recognising its multiplier effect on economic growth. Capital expenditure remained at 3.1% of GDP during 2025–26 and is budgeted to increase by 11.5% in 2026–27. The report also projected that the Centre's debt-to-GDP ratio would decline to 55.6%, reflecting improving fiscal sustainability.

State Finances Showed Signs of Prudence

The RBI report noted that state governments collectively budgeted a Gross Fiscal Deficit of 3.3% of GDP during 2025–26.

The recommendations of the Sixteenth Finance Commission (FC-XVI) retained the 41% share of states in the divisible tax pool. At the same time, the Commission introduced a new criterion based on states' contribution to national GDP, assigning it a 10% weightage in horizontal devolution.

The report also highlighted that post-devolution revenue deficit grants had been discontinued, reflecting an attempt to strengthen fiscal responsibility and encourage states to improve their own revenue-generating capacities.

India's External Sector Remained Resilient Despite Challenges

The RBI observed that India's external sector performed reasonably well despite rising global uncertainties.

However, the merchandise trade deficit widened significantly, increasing from USD 282.5 billion in the previous year to USD 333.2 billion during 2025–26. Exports of petroleum products, gems and jewellery, and rice witnessed contractions, contributing to this widening gap.

A notable development during the year was that China overtook the United States to become India's largest trading partner.

India also pursued an active trade diplomacy agenda by concluding important agreements such as the Comprehensive Economic and Trade Agreement (CETA) with the United Kingdom, the Comprehensive Economic Partnership Agreement (CEPA) with Oman, and a Free Trade Agreement (FTA) with New Zealand. Furthermore, negotiations for the India–European Union FTA were concluded in January 2026.

Services Exports and Remittances Continued to Provide Strength

While merchandise exports faced challenges, India's services sector emerged as a major source of resilience.

Net services exports grew by 15.3% during April–December 2025, reflecting India's competitiveness in knowledge-intensive sectors. Software and business services accounted for nearly 78% of total services exports, highlighting the growing importance of India's digital economy.

Workers' remittances also recorded strong growth of 10.1% during the same period. The RBI noted that the average cost of sending USD 200 to India stood at 5.3%, which is lower than the global average but still above the Sustainable Development Goal target of 3% by 2030.

Current Account and External Vulnerability Indicators Remained Comfortable

Despite the widening merchandise trade deficit, India's Current Account Deficit (CAD) remained manageable at 1.1% of GDP, amounting to USD 30.2 billion during April–December 2025.

The report highlighted an improvement in Foreign Direct Investment (FDI) inflows, with net FDI rising to USD 7.7 billion. India also emerged as the second-largest destination globally for greenfield FDI announcements, underscoring international investor confidence in the Indian economy.

Although foreign exchange reserves declined by USD 30.8 billion during the period, they remained adequate to finance approximately 11 months of merchandise imports. Moreover, reserves covered nearly 90% of India's total external debt.

The external debt-to-GDP ratio remained contained at 20.4%, indicating that India's external position remained stable and manageable.

Monetary Policy Supported Economic Growth

The RBI adopted an accommodative approach to support economic activity while ensuring price stability.

During 2025–26, the Monetary Policy Committee reduced the policy repo rate by a cumulative 100 basis points, bringing it down to 5.25%.

The policy stance was changed from neutral to accommodative in April 2025 to support growth. However, as economic conditions evolved, the RBI reverted to a neutral stance in June 2025, reflecting its balanced approach towards inflation and growth objectives.

Banking Sector Performance Improved

The report highlighted the robust health of India's banking sector.

The RBI reduced the Cash Reserve Ratio (CRR) by 100 basis points, lowering it to 3% of Net Demand and Time Liabilities (NDTL). This measure injected approximately ₹2.5 lakh crore of durable liquidity into the financial system.

Bank credit continued to expand at double-digit rates, with lending being broad-based across sectors. The services sector and retail borrowers emerged as major contributors to credit growth.

A particularly encouraging development was the 33.1% increase in credit extended to micro and small enterprises, reflecting targeted policy support towards employment-intensive sectors.

Furthermore, monetary policy transmission improved considerably. The Weighted Average Lending Rates (WALRs) on both fresh and outstanding loans declined substantially in response to the repo rate cuts, thereby reducing borrowing costs for businesses and households.

Labour Market Conditions are Expected to Improve

The RBI expressed optimism regarding employment prospects in the coming years.

The report noted that the full implementation of the Four Labour Codes, coupled with stronger domestic demand and productivity improvements, could lead to better labour market outcomes.

The expansion of credit to micro and small enterprises, which are significant generators of employment, is also expected to contribute positively towards job creation and inclusive growth.

Risks to the Growth Outlook

Despite the positive assessment, the RBI identified several risks that could adversely affect the economy.

These include the ongoing conflict in West Asia, which could lead to higher crude oil prices and increase India's import bill. Persistent global inflationary pressures, disruptions in supply chains, and extreme weather events affecting agricultural production could also pose challenges to growth and price stability.

Consequently, the RBI emphasised the importance of maintaining macroeconomic stability, policy flexibility, and structural reforms to navigate an increasingly uncertain global environment.

India's Economic Prospects and Strategic Initiatives for 2026–27

Global Economic Environment: An Increasingly Challenging Landscape

The Reserve Bank of India (RBI), in its Annual Report for 2025–26, observed that the global economy is likely to face heightened uncertainties during 2026–27. According to the International Monetary Fund (IMF), global economic growth is projected to moderate to 3.1% in 2026, while global inflation is expected to rise to 4.4%.

The deterioration in the global outlook has been largely attributed to the escalation of conflict in West Asia, which has disrupted major shipping routes, intensified supply chain bottlenecks, and contributed to rising energy prices. These developments are expected to adversely affect international trade, investment flows, and overall global economic activity.

Against this backdrop of increasing geopolitical instability and economic uncertainty, the RBI has emphasised that India's economic resilience will depend upon maintaining sound macroeconomic fundamentals and pursuing strategic reforms.

India's Growth Outlook Remains Positive

Despite the challenging global environment, the Indian economy is expected to maintain a strong growth trajectory during FY 2026–27.

The RBI projects real Gross Domestic Product (GDP) growth at 6.9%, indicating that India is likely to remain among the fastest-growing major economies in the world. This optimism is based on several favourable domestic factors, including strong household consumption, sustained public investment, improving corporate balance sheets, and a healthy banking sector.

At the same time, inflation is expected to remain within manageable limits. The RBI estimates Consumer Price Index (CPI) inflation at 4.6% during 2026–27.

Recognising the need to balance price stability with economic growth, the Monetary Policy Committee (MPC) has retained the policy repo rate at 5.25%. Furthermore, the Government of India has decided to continue the existing inflation-targeting framework, maintaining the inflation target at 4%, with a tolerance band of ±2%, until 31 March 2031.

This policy continuity provides stability and predictability to financial markets and economic agents.

Fiscal Consolidation to Strengthen Economic Stability

The RBI highlighted the importance of maintaining fiscal discipline to safeguard long-term macroeconomic stability.

Accordingly, the Gross Fiscal Deficit (GFD) has been targeted at 4.3% of GDP during 2026–27, continuing the government's gradual fiscal consolidation strategy initiated after the pandemic period.

A noteworthy development has been the establishment of an Economic Stabilisation Fund (ESF) by the Union Government. The fund is intended to act as a buffer mechanism against external economic shocks, enabling the government to respond effectively to unforeseen global disruptions without compromising fiscal sustainability.

The creation of such a stabilisation mechanism reflects a more proactive approach towards economic risk management.

Agriculture Continues to Face Climate-Related Uncertainties

The RBI noted that the performance of the agricultural sector remains closely linked to monsoon conditions.

During 2026–27, the possibility of El Niño conditions poses a significant downside risk to agricultural production, as such climatic events are generally associated with deficient rainfall in India.

However, the report also pointed out that a positive Indian Ocean Dipole (IOD) could partially offset the adverse effects of El Niño by supporting favourable rainfall patterns.

Given the importance of agriculture for employment, rural demand, and food security, the RBI stressed the need for enhanced climate resilience and technological interventions in the sector.

Manufacturing Sector to Receive Strategic Policy Support

Recognising manufacturing as a key driver of future growth, the Union Budget 2026–27 identified seven strategic sectors for focused policy support.

These sectors include areas such as semiconductors, rare earth processing, and biopharmaceuticals, which are critical for enhancing India's technological capabilities and reducing import dependence.

By promoting domestic manufacturing in these sunrise sectors, India aims to strengthen its position within global value chains and improve its long-term industrial competitiveness.

Climate Commitments to Shape Future Development

The RBI highlighted India's commitment towards achieving sustainable economic growth through its updated Nationally Determined Contributions (NDCs) for 2031–2035.

Under these revised commitments, India aims to ensure that 60% of its installed electricity generation capacity comes from non-fossil fuel sources by 2035.

Additionally, the country has pledged to achieve a 47% reduction in the emission intensity of GDP by 2035, compared to baseline levels.

These targets demonstrate India's attempt to balance developmental aspirations with environmental sustainability.

Foreign Investment and Trade Expansion

The report emphasised that attracting foreign investment remains an important component of India's growth strategy.

Several measures have been introduced to improve the investment climate, including permitting 100% Foreign Direct Investment (FDI) in satellite manufacturing.

In addition, incentives such as tax holidays and safe harbour provisions for data centres have been designed to encourage investments in emerging sectors.

The implementation of recently concluded Free Trade Agreements (FTAs) is also expected to enhance India's export competitiveness by improving market access and reducing trade barriers.

Together, these initiatives aim to integrate India more deeply into global production and trade networks.

Artificial Intelligence as a Driver of Future Growth

The RBI identified Artificial Intelligence (AI) as a major transformative force capable of reshaping economic activity.

Following the AI Impact Summit 2026, where the New Delhi Declaration on AI Impact was adopted, India has emerged as a significant player in the global AI landscape.

The report noted that India ranks third globally in AI competitiveness, supported by initiatives such as the IndiaAI Mission and substantial private sector investments.

The expansion of AI capabilities is expected to boost productivity, foster innovation, and generate new employment opportunities across sectors.

Advancing Digital Finance and Banking Innovation

The RBI reiterated its commitment to strengthening India's digital financial ecosystem.

The central bank plans to expand pilots related to the Central Bank Digital Currency (CBDC) to assess its potential benefits for the payment system.

The report also highlighted the importance of the Unified Lending Interface (ULI), which seeks to simplify credit delivery through digital platforms.

To combat emerging threats in the digital economy, the RBI intends to scale up MuleHunter.ai, an artificial intelligence-based framework designed to identify and prevent fraudulent transactions involving mule accounts.

Under the broader vision outlined in Payments Vision 2028, the RBI will operationalise the Digital Payments Intelligence Platform (DPIP) and advance the objectives of the National Strategy for Financial Inclusion (NSFI) 2025–30.

These initiatives are expected to enhance efficiency, security, and inclusiveness within the financial system.

Primary Global Economic Risks Identified by the RBI

Despite the favourable domestic outlook, the RBI warned that several external risks could undermine growth prospects.

Foremost among these is the ongoing geopolitical conflict in West Asia, which has re-emerged as a major source of global economic instability.

The IMF has consequently revised downward its estimate of global growth to 3.1% in 2026, while projecting that global trade volumes will slow to 2.8%.

At the same time, disruptions to critical shipping routes and rising energy prices have led to an upward revision of global inflation forecasts to 4.4%.

The RBI also cautioned that tighter financial conditions may trigger a "risk-off" sentiment among investors, resulting in increased market volatility and corrections in equity markets, particularly within highly valued technology sectors.

In addition, rising protectionism and growing concerns regarding debt sustainability across countries could further complicate the global economic environment.

The Way Forward

The RBI advocated a series of policy measures to strengthen India's resilience against these emerging challenges.

It recommended greater reliance on data-driven supervision, including the use of advanced analytics and the Supervisory Data Quality Index (sDQI), to identify stress within financial institutions at an early stage.

To preserve trust in digital financial systems, the RBI emphasised the need for the systematic implementation of the Digital Payments Intelligence Platform (DPIP) and wider deployment of MuleHunter.ai across the banking network.

The report also stressed the importance of adhering to the medium-term fiscal consolidation roadmap, thereby creating greater fiscal space and enabling increased private sector investment.

In the external sector, the RBI recommended expanding the use of Special Rupee Vostro Accounts (SRVAs) and Local Currency Arrangements (LCAs) to facilitate international trade in Indian Rupees and reduce exposure to exchange rate volatility.

For the agricultural sector, it proposed the expansion of the Bharat-VISTAAR platform, enabling the delivery of AI-driven weather advisories and crop management solutions to farmers in multiple regional languages.

Conclusion

The RBI's assessment suggests that India is well-positioned to navigate the uncertainties of the global economy during 2026–27. Strong domestic demand, improving fiscal indicators, resilient financial institutions, expanding digital infrastructure, and sustained public investment provide a robust foundation for continued economic growth.