R. Suryamurthy
India is poised for another year of robust economic growth in 2025-26, with a projected real GDP expansion of 6.5%, as detailed in the latest RBI Annual Report. A resurgence in domestic consumption, sustained government capital expenditure, and healthy financial sectors underpin this optimistic forecast. However, global uncertainties, including trade protectionism and geopolitical tensions, remain key to watch.
The Reserve Bank of India (RBI) paints a promising picture for the Indian economy, citing “revival in consumption demand, government’s continued thrust on capex while adhering to the path of fiscal consolidation, healthy balance sheets of banks and corporates, easing financial conditions, continuing resilience of the services sector and strengthening of consumer and business optimism, besides sound macroeconomic fundamentals.”
Agriculture Set for a Boost
The agricultural sector is expected to perform favorably in 2025-26, buoyed by an anticipated above-normal southwest monsoon and a slew of government initiatives. The Union Budget 2025-26 has introduced schemes like the Prime Minister Dhan-Dhaanya Krishi Yojana, Mission for Aatmanirbharta in pulses, and a comprehensive program for vegetables and fruits.
“The government’s proactive policies, coupled with a favorable monsoon forecast, are set to invigorate our agricultural sector,” noted a senior economist, emphasizing the focus on productivity enhancement and climate resilience. Efforts to promote sustainable farming, including covering one crore farmers under the National Mission on Natural Farming, underscore this commitment.
Manufacturing and Construction Poised for Traction
The manufacturing sector is anticipated to gain further momentum, driven by improved domestic demand, higher capacity utilization, and robust corporate and bank balance sheets. The ‘Make in India’ initiative is set to be strengthened through the ongoing PLI scheme and the newly announced National Manufacturing Mission.
“We expect the manufacturing sector to be a significant engine of growth, fueled by both internal demand and strategic policy support,” stated an industry expert, highlighting the government’s commitment to widening the manufacturing base.
The construction sector is also projected to maintain its strong performance, aided by increased allocations for the Pradhan Mantri Awas Yojana (PMAY) and the ambitious second Asset Monetisation Plan (2025-30), aiming to unlock ₹10 lakh crore. “These infrastructure initiatives are not only boosting construction but also creating vital employment opportunities and strengthening domestic demand,” an official commented.
Inflation Eases, Monetary Policy Turns Accommodative, Boosting Lending
A significant development has been the easing of headline inflation to 4.6% in 2024-25, largely attributed to government supply management measures and the lagged impact of monetary policy tightening. Looking ahead, the RBI projects CPI inflation for 2025-26 at 4.0%, with risks evenly balanced.
In a key move, the Monetary Policy Committee (MPC) in April 2025 unanimously voted to reduce the policy repo rate by 25 basis points to 6.0% and shifted its stance from neutral to accommodative. This decision reflects “greater confidence about a durable alignment of headline inflation with the target of 4.0 per cent over a 12-month horizon,” the RBI stated.
Commenting on the inflation outlook, Raghav Muthanna, Partner at IndusLaw, noted, “RBI’s CPI inflation projection of 4% this financial year as per its annual report is welcome news for the Indian consumer and borrower. Controlled inflation rate will likely see interest rate cuts by banks and NBFCs which should hopefully incentivize borrowing and spending.” He added that for digital lending players, “this news could not have come any sooner given recent actions by the RBI on increasing risk weights on unsecured loans and the recent release of the stricter Digital Lending Directions, that had prescribed additional obligations on regulated entities and their lending service providers.”
Technological Advancements and Financial Sector Resilience
India’s commitment to energy transition is evident with the target of 100 GW of nuclear power capacity by 2047, with an emphasis on small modular reactors (SMRs). The Union Budget has also significantly increased funding for the Pradhan Mantri Surya Ghar Muft Bijli Yojana, accelerating renewable energy adoption.
A substantial increase in the budget for the Ministry of Science and Technology in 2025-26 signals a strong push for R&D and innovation. The government’s plan to facilitate the development of multiple sovereign foundational AI models, including Large Language Models (LLMs), is set to further strengthen India’s AI capabilities.
The Indian banking sector continues to exhibit resilience, supported by improved asset quality and well-capitalized banks. The RBI is undertaking several initiatives to enhance the financial system’s safety, soundness, and inclusivity, including leveraging technology for secure and accessible financial services. The PRAVAAH portal, now mandatory for regulated entities, aims to streamline regulatory approvals.
Vijay Mani, Partner, Banking & Capital Markets Leader, Deloitte India, highlighted key positives from the RBI report for the financial sector. “Key positive points to note in the RBI FY25 annual report are the narrowing gap between deposit growth and credit growth, even as credit growth remained in double digits, and a relatively healthy FY26 real GDP growth forecast of 6.5%,” Mani stated. He concluded, “These suggest a positive FY26 growth outlook for banks and NBFCs, with the caution that loan portfolios will need to tilt towards lower-risk retail. Another cautionary note in the report was the call-out for continued enhancements to stress testing, the need to maintain adequate liquidity buffers, and the need for more attention towards cybersecurity, outsourcing and operational risk management and resilience, particularly the management of risks relating to collaborative lending models. As such, overall, the report calls for a cautiously optimistic FY26 outlook for the banking and NBFC sector.”
The promising GDP growth outlook is also favorable for the fintech sector. Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X, remarked, “The RBI’s forecast of 6.5% GDP growth for FY26, driven by strong domestic demand and increased investments, signals a promising outlook for the fintech sector, especially in MSME financing.” Arora emphasized that with “rural consumption picking up and public capital expenditure on the rise, the demand for accessible, tech-enabled credit solutions is set to grow significantly. The easing inflation and RBI’s accommodative stance are expected to lower borrowing costs, further boosting credit uptake.” He added, “As digital adoption accelerates across financial services, fintech companies are well-positioned to empower small businesses with innovative lending platforms, driving inclusive growth and financial resilience across India.”
Dipanwita Mazumdar and Jahnavi, economists with Bank of Baroda, provided further insights into the RBI’s financial strength. They noted that “RBI’s balance sheet expanded by 8.2% to Rs 76 lakh crore in FY25 compared to Rs 70 lakh crore in FY24.” They added, “On the assets side, RBI gold holding has contributed to a significant increase, as safe-haven demand rose in a volatile global policy environment. The remaining increase was seen in the domestic investment portfolio of RBI led by conduct of OMO purchase for liquidity management. The income and expenditure statement showed that the record high dividend transfer to the government was possible on account of higher gains from foreign currency assets (FCA).”
The SBI Ecowrap report also highlighted significant financial stability. It stated that “the latest RBI Annual Report indicates that household sector showed strong financial resilience, with net savings rising to 5.1% of GNDI in FY24 and expected to hit ₹22 lakh crore (6.5% of GDP) in FY25. This growing capital pool remains crucial for funding government and corporate deficits and supporting macroeconomic stability.” The report further detailed that “RBI’s balance sheet expanded by 8.19% in FY25 less than nominal GDP growth of 9.9%,” and despite contractions in traditional income streams, “strategic management of foreign exchange operations and efforts to mitigate rupee volatility materially enhanced surplus generation.” A significant “₹44,861.7 crore provision to the Contingency Fund kept Realized Equity healthy at 7.5% of the balance sheet, enabling record ₹2.69 lakh crore surplus transfers to the government and enhancing the fiscal space.” The report also noted the increase in total gold holdings to 879.58 metric tonnes, reflecting an appreciation in gold prices.
Regarding currency, the SBI Ecowrap observed that “Currency in circulation expanded steadily in FY25 with banknotes in circulation rising by 6% in value and 5.6% in volume. ₹500 notes dominated both value and volume. Withdrawal of ₹2000 notes progressed well, reclaiming 98.2% of circulation. Increased issuance of durable ₹10 coins alongside reduced ₹10 notes marks a cost-effective currency shift.” While counterfeit note detections fell overall, they rose for ₹200 and ₹500 denominations, “necessitating ongoing advancements in anti-counterfeiting technologies and enforcement mechanisms.”
In the digital domain, the report highlighted that “the RBI’s retail digital currency (e₹-R) pilot encompassing 17 banks and 60 million users witnessed the value of e₹ in circulation soaring by an impressive 334% in FY25. The introduction of offline functionality and programmable features, coupled with the inclusion of non-bank wallet providers, augments financial inclusion and signals a transformative evolution in India’s payments ecosystem.” The RBI’s regulatory framework continues to evolve, with “87 public consultations over the past four years” and “173 measures implemented over the past four years, including 43 in FY25 alone” towards customer-centric reforms. While the incidence of fraud cases declined, “fraud amounts tripled to Rs 36,014 crore, mainly due to surging advances-related fraud. In contrast card and internet frauds volume diminished significantly from 29,802 in FY24 to 13,516 in FY25. In summary, India’s financial system stands at crossroads— resilient and transformative.”
Global Headwinds and External Sector Strength
While the domestic outlook is positive, the RBI acknowledges “uncertainty about global trade post-protectionist measures, protracted geopolitical tensions and global financial market volatility” as potential downside risks to growth and upside risks to inflation.
Despite these global headwinds, India’s external sector remains robust. Merchandise exports are expected to navigate a projected slowdown in global trade, with ongoing trade agreement negotiations and the expansion of key export sectors like electronics and pharmaceuticals providing support. The strong outlook for India’s services trade balance and inward remittance receipts is expected to keep the Current Account Deficit (CAD) within sustainable limits.
Furthermore, the inclusion of Indian sovereign bonds in global bond indices and the increased FDI cap in the insurance sector are anticipated to bolster foreign investment flows, strengthening India’s external resilience. The ongoing efforts to internationalize the Indian Rupee and promote local currency settlements for cross-border transactions also reflect a strategic vision for global trade.
India enters 2025-26 with a strong economic foundation and a proactive policy framework. As one senior analyst put it, “The Indian economy is poised to remain the fastest-growing major economy, leveraging its sound macroeconomic fundamentals and robust financial sector.” While global uncertainties persist, India’s internal strengths and strategic initiatives are expected to ensure continued economic stability and growth.