RBI Annual Report 2025-26: India Remains Resilient Amid Global Headwinds

Key Highlights of RBI Annual Report 2025-26

Domestic Growth and Output

• India maintained its position as one of the fastest-growing major economies with real GDP growth estimated at 7.3% in 2025-26 (revised upward from initial projection of 6.5%)
• Private Final Consumption Expenditure grew by 7.7%
• Gross Capital Formation increased by 6.5%
• Services GVA expanded by 8.7%
• Manufacturing GVA registered robust 11.5% growth — its strongest performance in recent years
• Growth was supported by manufacturing revival, strong rural demand, and gradual recovery in urban consumption

Inflation and Price Situation

• Average headline CPI for 2025-26 was revised progressively downward from 4.0% to as low as 2.0% (as of December 2025)
• The significant decline in headline inflation was primarily driven by volatile food prices
• Core inflation remained stable around 4%, limiting scope for further aggressive easing
• MPC noted that while food inflation declined substantially, core inflation persistence constrained policy space

State of Government Finances

• Gross Fiscal Deficit (GFD) for 2025-26 (RE) came in at 4.4% of GDP, down from 4.8% in 2024-25
• GFD for 2026-27 is budgeted at 4.3% of GDP, continuing downward trend from pandemic peak of 9.2% in 2020-21
• Gross tax revenue grew 7.4%, driven by corporation tax and strong excise/customs duty collections
• Non-tax revenue recorded robust growth of 24.4%
• Capital expenditure remained steady at 3.1% of GDP (2025-26 RE) and is budgeted to grow 11.5% in 2026-27
• Centre's debt-to-GDP ratio is budgeted to decline to 55.6% in 2026-27

State Finances

• States had budgeted a GFD of 3.3% of GDP for 2025-26
• 16th Finance Commission (FC-XVI) retained states' share at 41% of divisible tax pool
• New criterion introduced: states' contribution to GDP (weight: 10%)
• Post-devolution revenue deficit grants discontinued to strengthen fiscal discipline

India's External Sector

Merchandise Trade

• Merchandise trade deficit widened to USD 333.2 billion in 2025-26 (from USD 282.5 billion prior year)
• Petroleum products, gems & jewellery, and rice saw export contractions
• China overtook the US as India's largest trading partner in 2025-26 (major trade shift)
• India signed trade agreements with UK (CETA), Oman (CEPA), and New Zealand (FTA)
• FTA negotiations with EU concluded in January 2026

Services and Remittances

• Net services exports grew 15.3% (y-o-y) during April-December 2025
• Software and business services accounted for 77.8% of services exports
• Workers' remittances posted robust growth of 10.1% (y-o-y)
• Average cost of sending USD 200 to India stood at 5.3% (below global average of 6.4% but above SDG target of 3%)

Current Account and Capital Flows

• Current Account Deficit (CAD) contained at USD 30.2 billion (1.1% of GDP) during April-December 2025
• Net FDI improved to USD 7.7 billion
• India ranked second globally in greenfield FDI announcements (after the US)

Foreign Exchange Reserves

• Forex reserves declined by USD 30.8 billion (April-December 2025) on BoP basis
• Reserves provided cover of approximately 11 months of merchandise imports
• Stood at around 90% of total external debt at end-December 2025
• External debt-to-GDP ratio remained contained at 20.4%

Monetary Policy and Banking Performance

Repo Rate Actions

• MPC cut policy repo rate by cumulative 100 bps during 2025-26, bringing it to 5.25%
• Stance changed from neutral to accommodative in April 2025, before reverting to neutral in June 2025

Liquidity Management

• Cash Reserve Ratio (CRR) reduced by 100 bps in staggered manner (September–November 2025) to 3.0% of NDTL
• This injected approximately Rs 2.5 lakh crore of durable liquidity

Credit Offtake

• Bank credit expanded in double digits, largely broad-based, led by services and retail sectors
• Credit to micro and small enterprises grew by 33.1%

Policy Transmission

• WALRs on fresh and outstanding rupee loans declined by 95 bps and 78 bps respectively

Labour Market

• Labour market conditions expected to improve with full implementation of Four Labour Codes
• Supported by stronger domestic demand and higher productivity

Strategic Initiatives for 2026-27

Economic Stabilisation Fund (ESF)

• Established as fiscal buffer against global macroeconomic headwinds
• Protects public finances from commodity price volatility and geopolitical disruptions

Bharat-VISTAAR

• AI-enabled agricultural advisory platform
• Provides real-time crop management, weather forecasts, and farm decision-support services

IndiaAI Mission

• India ranks third globally for AI competitiveness
• Supported by New Delhi Declaration on AI Impact (adopted at AI Impact Summit 2026)
• Significant private investments flowing into AI sector

CBDC Expansion

• RBI plans to expand Central Bank Digital Currency pilots
• Part of broader digital payments transformation

Digital Financial Infrastructure

• Unified Lending Interface (ULI) for seamless credit delivery
• MuleHunter.ai framework to combat digital payment frauds
• Digital Payments Intelligence Platform (DPIP) guided by Payments Vision 2028
• National Strategy for Financial Inclusion (NSFI) 2025-30

Global Economic Risks

Dominant Drag on Global Growth

• Geopolitical risk has re-emerged as primary drag on global expansion
• West Asia conflict (beginning February 2026) heavily downgraded global projections

IMF Projections

• Global growth downgraded to 3.1% in 2026 (from 3.3% in January)
• Global trade volumes to decelerate to 2.8%
• Global inflation raised to 4.4% (up from 3.8% in January)

Key Risks Identified

• West Asia conflict and associated supply chain disruptions
• Elevated energy prices
• Shipping route disruptions
• Rising protectionism
• Debt sustainability concerns
• Potential reassessment of elevated technology sector valuations

Way Forward

Policy Recommendations

1. Data-Driven Supervision: Deploy advanced micro-data analytics and Supervisory Data Quality Index (sDQI)
2. Combating Digital Frauds: Systematically implement DPIP and MuleHunter.ai registry
3. Fiscal Discipline: Maintain strict adherence to medium-term fiscal consolidation path
4. Internationalisation of Rupee: Expand Special Rupee Vostro Accounts (SRVAs) and Local Currency Arrangements (LCAs)
5. Tech-Driven Agriculture: Expand Bharat-VISTAAR platform for smallholders

Constitutional and Legal Framework

• Monetary Policy Committee (MPC): Constituted under the Reserve Bank of India Act, 1934 (Section 45Z)
• Inflation Targeting Framework: Follows the Monetary Policy Framework Agreement signed between RBI and Government in 2015
• Fiscal Responsibility and Budget Management (FRBM) Act: Provides framework for fiscal consolidation
• Banking Regulation Act, 1949: Governs banking supervision and regulation

Key Statistical Summary