After 8.2 per cent gross domestic product (GDP) growth in the July-September period, the Reserve Bank of India (RBI) has raised its outlook for FY25-26 to 7.3 per cent from 6.8 per cent. The upgrade came alongside a 25-basis-point policy rate cut to 5.25 per cent, signalling the RBI’s view that subdued inflation allows room to support growth.
Economic activity in the first half has benefited from income-tax and GST rationalisation, lower crude prices, front-loaded government capex and easier financial conditions driven by easing inflation. High-frequency data suggest domestic momentum remains firm in Q3, though the RBI acknowledges emerging softness in select indicators that will require close monitoring.
"Slowing inflation has allowed the Reserve Bank of India to deliver a 25 bps repo rate cut while maintaining a neutral stance, a move aimed at sustaining growth and, more importantly, reviving credit growth, which has been moderate in recent months. By lowering borrowing costs, the RBI seeks to stimulate private investment and consumption," said Rumki Majumdar, Economist, Deloitte India.
India's Goldilocks’ Phase
The RBI’s latest move fits into what policymakers describe as a ‘Goldilocks’ phase for India, a rare period of strong growth, subdued inflation and easing financial conditions without signs of instability and the central bank has announced liquidity injections of up to USD 16 billion to reinforce this balance.
RBI Governor Sanjay Malhotra said in a video address that India is currently in a “rare goldilocks” phase, marked by rapid disinflation since October, enough to push inflation below the central bank’s lower tolerance band, while economic growth remains firm. These conditions, he noted, give the central bank “policy space” to further support activity, adding at the post-policy briefing that rates are expected to stay low as long as inflation remains subdued.
To bolster liquidity and aid the transmission of lower rates, the RBI announced it will conduct Rs 1 trillion worth of bond purchases this month and carry out an additional USD 5 billion in forex swaps. Nuvama, in a report, said, “Nominal GDP rather than real GDP is a better metric of growth. Today, much like weak NGDP growth, corporate revenue and household wage dynamics too remain anaemic. While GST cuts may support the consumption outlook, slower government spending could weigh on capex and exports remain sluggish, underscoring the need for continued policy support.”
Deloitte expects growth to strengthen further to 7.5 to 7.8 per cent in FY2025-26, building on the robust 8 per cent GDP expansion already recorded in the first half. Majumdar added, “We anticipate the momentum to continue in Q3, supported by festive-season demand, direct tax cuts and the recent GST rate rationalisations, and easing inflation. Our outlook is slightly more upbeat than the RBI’s 7.3 per cent projection and we expect India to grow by 7.6 per cent this fiscal year.”
Economists, however, caution that sustaining this Goldilocks run will depend on how effectively lower rates, improved liquidity and tax rationalisations translate into stronger private investment. While domestic demand remains resilient, analysts note that weak external conditions, soft exports and uneven rural recovery could test the durability of the current momentum in the quarters ahead.
“The MPC’s unanimous decision to reduce the repo rate to 5.25 per cent is a timely and decisive move that aligns perfectly with the current 'Goldilocks' moment in the Indian economy, where high growth coexists with unprecedentedly low inflation. With Q2 GDP accelerating to 8.2 per cent and October inflation dipping to a mere 0.3 per cent, the RBI has successfully transitioned from fighting price rise to fueling momentum," said Umesh Revankar, Executive Vice Chairman, Shriram Finance.
Global Uncertainty Amid Stellar Growth
India's central bank also stated that the uncertain global conditions pose downside risks despite India’s stellar economic momentum, with President Donald Trump’s 50 per cent tariff war on Indian goods, a renewed escalation in US-China trade tensions and volatile external demand threatening to weigh on exports and investment.
"RBI repo cut of 25 basis points is good for the overall growth of the economy. While not good for the FD investors, it offers a great number of opportunities across other asset classes, like mutual funds. Depending on their risk appetites, the investors can reallocate the portfolio from FD to mutual funds," said Vivek Iyer, Partner and Financial Services Risk Advisory Leader, Grant Thornton Bharat.
Notably, high-frequency indicators suggest that domestic economic activity is holding up in Q3FY26; there are some emerging signs of weakness in a few leading indicators. PMI Manufacturing has moderated to a nine-month low of 56.6 in November 2025, accompanied by moderate growth of the Index of Industrial production at 0.4 per cent in October 2025 from 4.6 per cent in September 2025.
"Evolving geopolitical conditions, divergent inflation paths and trade environments globally continue to weigh on the outlook. Merchandise exports face some headwinds as they declined sharply in October amid subdued external demand, accompanied by softer services exports, said Rajeev Juneja, President, PHD Chamber of Commerce and Industry (PHDCCI).
India is navigating a rare Goldilocks economy, marked by strong growth, subdued inflation and supportive financial conditions. With the RBI cutting rates, boosting liquidity, and maintaining a neutral stance, policymakers aim to sustain domestic momentum, revive credit growth, and encourage private investment, even as global volatility and soft exports pose potential risks. |
