RBI raises FY26 GDP projection on GST 2.0 boost, bountiful monsoon

RBI raised its full-year GDP growth forecast for FY2025-26 even as it trimmed projections for the latter half of the fiscal, citing risks from evolving global trade dynamics, particularly the tariff policy under U.S. President Donald Trump.

The Reserve Bank of India (RBI), at its bi-monthly monetary policy meeting held on Wednesday, revised India’s real GDP growth estimate for FY26 to 6.8%, up from 6.7% earlier. This upward revision came despite downward adjustments for Q3 and Q4, reflecting optimism around domestic economic resilience.

The Monetary Policy Committee (MPC) also decided to keep the benchmark repo rate unchanged at 5.50% for the second consecutive meeting, maintaining a 'neutral' stance. This decision came despite speculation of a possible rate cut, driven by consistently lower-than-expected inflation figures.

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Revised Quarterly GDP Forecasts

While the overall growth outlook has improved, the RBI revised its quarterly projections with a mixed tone:

Q2 FY26: GDP forecast raised to 7.0% from 6.7%

Q3 FY26: GDP forecast lowered to 6.4% from 6.6%

Q4 FY26: GDP forecast trimmed to 6.2% from 6.3%

Q1 FY27: GDP forecast reduced to 6.4% from 6.6%

The adjustments reflect concerns around external pressures, including tariffs and trade frictions, as well as a moderation in global demand.

As per Monetary Policy Statement, Buoyancy in services sector coupled with steady employment conditions are supportive of demand, which is expected to get a further boost from the rationalisation of goods and services tax (GST) rates. Rising capacity utilisation, conducive financial conditions, and improving domestic demand should continue to facilitate fixed investment.

However, ongoing tariff and trade policy uncertainties will impact external demand for goods and services. Prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors also pose downside risks to the growth outlook.

Inflation Continues to Undershoot

Retail inflation has remained significantly below the RBI’s 4% target for seven straight months. The Consumer Price Index (CPI) rose 2.07% in August and 1.61% in July.