Despite US President Trump's tariff war, RBI retains FY26 GDP growth forecast at 6.5%

Indian Express

06-08-2025

The Reserve Bank of India (RBI) on Wednesday sharply lowered its inflation forecast for the current fiscal by 60 basis points (bps) to 3.1 per cent, although it continues to see the GDP growing by 6.5 per cent, Governor Sanjay Malhotra said.
While announcing the Monetary Policy Committee's (MPC) decision to leave the policy repo rate unchanged at 5.5 per cent — with all six members of the rate-setting panel in favour of leaving the interest rate unchanged — Malhotra said that domestic growth is holding up and is evolving broadly along the lines of the central bank's assessment, even though some high-frequency indicators showed had been mixed in May and June.
'Rural consumption remains resilient while urban consumption revival, especially discretionary spending, is tepid. Fixed investment supported by buoyant government capex continues to support economic activity,' Malhotra said.
The RBI's retention of the growth forecast for the current year comes days after the International Monetary Fund (IMF) on July 29 raised its own forecast for India to 6.4 per cent for both 2025-26 and 2026-27 on account of easing global trade tensions. However, a day later, US President Donald Trump sent shockwaves by announcing a 25 per cent tariff on India — along with an additional but unspecified 'penalty' for its defence and energy imports from Russia — even as the two countries negotiate a bilateral trade agreement. Trump said India has 'the most strenuous and obnoxious non-monetary Trade Barriers of any Country'. Since then, the US President has threatened to raise the tariff on Indian goods substantially higher.
While the RBI has not changed its growth forecast due to the 25 per cent tariff, which is effective from Thursday, economists have warned that India's growth rate in the current fiscal could be hit by 20-40 bps and could even fall below 6 per cent.
To be sure, the MPC noted in its statement that while geopolitical uncertainties have somewhat eased from their peaks in recent months, 'trade negotiation challenges continue to linger', adding that prospects of external demand 'remain uncertain amidst ongoing tariff announcements and trade negotiations'.
'The headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook,' the MPC said in its statement.
According to the RBI, GDP growth is seen at 6.5 per cent in April-June 2025, 6.7 per cent in July-September 2025, 6.6 per cent in October-December 2025, and 6.3 per cent in January-March 2026. For the first quarter of 2026-27, the RBI sees growth at 6.6 per cent. As per latest data, India's GDP expanded by 6.5 per cent in 2024-25, with the last quarter of the previous fiscal seeing growth at an unexpectedly high 7.4 per cent. GDP data for April-June 2025 will be released at the end of August.
'We think going ahead downside risks to growth would be increasingly evident with new global resets and could still open up space for easing in (the) remainder of the year, even though the Governor seems to have raised the bar higher for further easing,' Madhavi Arora, Chief Economist at Emkay Global Financial Services, said.
Inflation markdown
While the RBI retained its GDP growth forecast for 2025-26, it expectedly made a sharp downward revision to the inflation forecast, with Consumer Price Index (CPI) based inflation trending sharply lower in recent months. As per the central bank's latest estimates, CPI inflation is seen averaging 3.1 per cent in 2025-26, down from the 3.7 per cent it had predicted in June.
The quarterly forecasts have also been cut substantially. In July-September 2025, CPI inflation is expected to average 2.1 per cent, down from 3.4 per cent predicted in June, while it is seen at 3.1 per cent in October-December 2025 as against the previous projection of 3.9 per cent. The CPI inflation forecast for the final quarter of the current fiscal has not been changed and remains at 4.4 per cent. For the first quarter of 2026-27, the RBI sees average inflation rising further to 4.9 per cent.
As per latest data, India's CPI inflation averaged 2.7 per cent in April-June 2025, with headline retail inflation slumping to a 77-month low of 2.1 per cent in June. CPI inflation has been lower than the RBI's medium-term target of 4 per cent for five months in a row.
In its statement, the MPC said the inflation outlook for 2025-26 has become 'more benign than expected in June', with a favourable base effect and steady progress of the southwest monsoon and the resultant healthy kharif sowing, adequate reservoir levels, and comfortable buffer stocks of foodgrains aiding in this decline.
'High-frequency price indicators signal a continuation of the lower price momentum in food prices to July as well,' the RBI governor said in his statement.
CPI inflation data for July will be released on August 12.
Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy.
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