RBI Annual Report: FY27 growth seen at 6.9%; inflation risks remain — key takeaways

RBI Annual Report: The Reserve Bank of India on Thursday released its Annual Report for 2025-26, highlighting that the Indian economy remained the fastest-growing major economy in the world despite global geopolitical tensions, trade uncertainty and volatile financial markets.

The central bank said India’s strong domestic demand, healthy banking system, improving fiscal position and stable macroeconomic fundamentals helped the economy maintain resilience during FY26.

According to the report, India’s GDP growth accelerated to 7.6 per cent in FY26 from 7.1 per cent in the previous year. The RBI said private consumption and investment remained the key drivers of growth, while the impact of higher US tariffs and global trade disruptions remained limited on the domestic economy.

The central bank noted that India continued to benefit from strong domestic demand and lower dependence on exports compared to several other major economies. However, it cautioned that rising energy prices, geopolitical tensions in West Asia and volatility in global financial markets remain key risks for the outlook ahead.

Inflation eases sharply in FY26

One of the biggest highlights of the report was the sharp moderation in inflation during FY26. Headline retail inflation fell to 2.1 per cent from 4.6 per cent in FY25, mainly due to softer food prices and favourable base effects. The RBI said inflation excluding food and fuel remained largely contained despite higher prices of precious metals such as gold and silver.

With inflation easing significantly, the Monetary Policy Committee reduced the repo rate by 100 basis points during FY26. The RBI maintained surplus liquidity conditions through open market operations, CRR cuts and other liquidity measures to support growth and monetary transmission.

The report also said transmission of policy rate cuts to lending and deposit rates remained strong during the easing cycle, aided by healthy liquidity conditions and increasing adoption of external benchmark-linked lending rates.

Manufacturing, services sectors support growth

The RBI said the industrial sector posted strong growth in FY26, aided by robust manufacturing activity. Sectors such as motor vehicles, transport equipment and metals saw healthy expansion, supported by policy measures like the production-linked incentive (PLI) scheme and the National Manufacturing Mission.

The services sector remained the biggest contributor to economic activity and accounted for nearly 69 per cent of real gross value added growth during the year. Financial services, IT, professional services, transport and hospitality segments recorded strong performance.

The report also highlighted India’s growing renewable energy push. The country’s installed renewable energy capacity crossed 250 GW during FY26, while electric vehicle sales crossed 25 lakh units, supported by government schemes promoting clean mobility.

Fiscal deficit improves, forex reserves remain strong

On the fiscal front, the RBI said the central government achieved its fiscal consolidation target by bringing the gross fiscal deficit down to 4.4 per cent of GDP in FY26. Higher direct tax collections and controlled revenue expenditure supported the improvement in government finances.

India’s current account deficit remained manageable at 1.0 per cent of GDP during April-December 2025 despite a wider merchandise trade deficit. Strong services exports and remittance inflows helped support the external sector.

The RBI said foreign exchange reserves stood at US$691.1 billion at the end of March 2026, providing import cover of around 11 months and acting as a strong buffer against global uncertainties.

Banking sector remains healthy

The report said bank credit growth accelerated to 15.9 per cent in FY26 compared to 10.9 per cent a year ago. Gross non-performing assets declined to a multi-decadal low, while banks remained well-capitalised with strong capital buffers.

The RBI also noted that stress tests showed banks are capable of handling adverse economic scenarios while maintaining capital above regulatory requirements. Asset quality and capital adequacy of non-banking financial companies also remained healthy during the year.

UPI crosses 200 billion transactions

Digital payments continued to see rapid growth in FY26. UPI transaction volume increased 30 per cent during the year and crossed 200 billion transactions, according to the report. The RBI-Digital Payments Index also rose 11 per cent year-on-year, reflecting deeper penetration of digital payments across the country.

The RBI said it continued work on CBDC pilots, cross-border payment systems and tokenisation projects during the year. The central bank also highlighted measures aimed at strengthening cybersecurity, customer protection and financial inclusion.

FY27 outlook

Looking ahead, the RBI projected India’s GDP growth at 6.9 per cent in FY27, while CPI inflation is expected at 4.6 per cent. The central bank said risks to inflation remain tilted to the upside due to geopolitical tensions, higher commodity prices and possible global supply disruptions.

The report added that India’s growth outlook continues to remain positive due to strong domestic fundamentals, healthy corporate and bank balance sheets, and the government’s continued focus on capital expenditure and infrastructure creation.