RBI Flags Strong Domestic Growth Amid Rising Global Uncertainties

Why in News?

The Reserve Bank of India (RBI), in its State of the Economy article, has assessed India’s macroeconomic conditions using high-frequency indicators for December 2025. The assessment highlights continued growth momentum, resilient domestic demand, and optimism about future prospects, despite elevated global geopolitical and geo-economic risks. The views expressed in the article are those of the authors and do not represent the official stance of the RBI.

Key Growth Signals – Domestic Economy

Robust demand conditions

• High-frequency indicators point to sustained buoyancy in growth impulses.
• Demand remains upbeat, driven by strong consumption and broad-based economic activity.

Revival of rural demand

• Retail automobile sales recorded broad-based growth across categories.
• Key drivers include:
  • GST rate cuts improving affordability,
  • Year-end promotional offers,
  • Pre-buying ahead of expected price hikes in January.

Commercial activity and logistics

• Retail commercial vehicle sales maintained strong growth, indicating:
  • Improved goods movement,
  • Healthy logistics activity,
  • Strong underlying economic momentum.

GST and formal economy indicators

• E-way bill generation continued healthy growth, reflecting:
  • GST rate rationalisation,
  • Stock clearance,
  • Firms pushing year-end sales.
• These trends point to continued formalisation and compliance within the economy.

Macro-Economic Indicators

GDP Growth

• As per the National Statistics Office’s first advance estimate,
  Real GDP growth for 2025–26 is projected at 7.4%, up from 6.5% a year earlier, indicating an acceleration in economic activity.

Inflation Trends

• In December, CPI inflation rose to 1.3%, driven by:
  • A lower rate of deflation in the food group,
  • An increase in core inflation.
• While inflation remains moderate, the RBI signals the need for vigilance amid external risks.

Global Geopolitical and Geo-Economic Risks

Key developments at the start of 2026

• US intervention in Venezuela,
• Ongoing Middle East conflict,
• Uncertainty over a Russia–Ukraine peace deal,
• Escalation of the Greenland dispute.

Implications

• Elevated geo-economic risks,
• High policy uncertainty,
• Potential spillover effects on:
  • Trade flows,
  • Energy prices,
  • Capital movements.

These uncertainties pose challenges to global growth and financial stability, requiring proactive macroeconomic management.

Structural Reforms and Policy Environment (2025)

Major reforms highlighted

• Rationalisation of tax structures,
• Implementation of labour codes (labour market reforms),
• Financial sector deregulation.

Expected outcomes

• Improved growth prospects,
• Enhanced productivity,
• Strengthened medium- to long-term economic fundamentals.

The RBI underscores that reform momentum remains a key pillar of India’s economic resilience.

External Sector and Trade Strategy

Export diversification

• India has significantly expanded its export footprint by targeting:
  • New markets in Africa and Latin America,
  • Reducing dependence on traditional markets.

Trade negotiations

• Ongoing negotiations with 14 countries and groupings, covering nearly 50 nations, including:
  • European Union (EU),
  • Gulf Cooperation Council (GCC),
  • United States.

These efforts aim to secure better market access and strengthen India’s integration into global value chains.

Challenges and Way Ahead

Persisting global instability

• Strategy: Strengthen domestic demand while boosting export competitiveness.

Risk of imported inflation

• Tackle through:
  • Monetary measures (interest rate adjustments),
  • Fiscal actions (reducing import duties),
  • Trade policies (boosting domestic supply chains).

Balancing growth and inflation

• Maintain a calibrated approach between:
  • Innovation vs. stability,
  • Growth vs. consumer protection.

Ensuring inclusive and sustainable growth

• Deepen structural reforms to enhance productivity and economic resilience.

Managing policy uncertainty

• Continue prudent regulation and supervision to safeguard financial stability.