RBI cuts India's FY26 growth forecast to 6.5%, trims repo rate by 25 bps amid global uncertainty

Alongside this adjustment, the central bank reduced the benchmark repo rate by 25 basis points to 6%.

This marks RBI Governor Sanjay Malhotra’s second policy address since assuming office in December 2024.

The review comes at a time when global economic conditions remain fragile, weighed down by intensifying trade tensions and volatile market dynamics.

GDP outlook lowered amid global headwinds

Explaining the rationale behind the downgrade, Governor Malhotra pointed to heightened risks in global trade and policy uncertainties. He noted that despite India’s steady growth trajectory, the external environment continues to pose challenges.

The RBI now projects GDP growth for FY26 at 6.5%. According to the central bank’s estimates, growth in the first quarter of the fiscal year is expected to be 6.5%, followed by 6.7% in the second quarter, 6.6% in the third, and 6.3% in the fourth.

Malhotra said the forecasts are underpinned by current data trends and take into account a balanced risk outlook.

Inflation seen under control, helped by food prices

On inflation, the central bank highlighted a sharp moderation in recent months, largely driven by a drop in food prices in January and February.

Supported by favourable crop projections and better supply chains, the inflation outlook is expected to remain within the RBI’s comfort zone.

The Consumer Price Index (CPI)-based inflation for FY26 is projected at 4%. The central bank expects inflation to be around 3.6% in the first quarter, 3.9% in the second, 3.8% in the third, and 4.4% in the final quarter of the fiscal year.

The recent dip in global crude oil prices also offers some relief, though the RBI cautioned that external shocks and adverse weather events could still influence price trends.

Household inflation expectations have declined significantly, according to the central bank’s latest survey, which should help contain inflation further, Malhotra noted.

Favourable monsoon outlook supports agricultural stability

Commenting on weather conditions, Governor Malhotra said the India Meteorological Department (IMD) has predicted a normal monsoon for the year. The El Niño effect, which often disrupts rainfall patterns, is not expected to impact India this season, offering a boost to food output and helping keep prices stable.

External sector remains resilient

The RBI observed that India’s services exports held firm through January and February 2025, led by software, business, and transport services. Remittances from non-resident Indians also remained robust, contributing to the country’s sound external position.

With a manageable trade deficit and healthy foreign exchange reserves, the RBI said the external sector remains well-equipped to absorb global shocks in the short term.