State Bank of India (SBI) expects India’s gross domestic product (GDP) growth to exceed 7 per cent in both the third and fourth quarters of FY26, supported by improving consumption, stable inflation and accommodative monetary conditions, according to its latest Ecowrap report dated 5 December 2025.
SBI Research forecasts full-year GDP growth at 7.6 per cent for FY26, higher than the Reserve Bank of India’s (RBI) revised estimate of 7.3 per cent, driven by robust festive spending, strong rural demand and a gradual recovery in urban consumption. RBI has projected real GDP growth at 7.0 per cent for Q3 FY26 and 6.5 per cent for Q4 FY26, while SBI expects growth to outperform these estimates in the second half of the financial year.
According to the report, rural demand has remained robust following GST rationalisation, while urban demand has started to recover amid higher festive spending across regions. This improvement in consumption trends is expected to lift output across the manufacturing and services sectors during the second half of the year.
SBI Research also noted that the new GDP data series scheduled for release on 27 February 2026 could alter growth estimates across quarters.
Rate Cut And Liquidity Boost Aid Momentum
The upbeat growth outlook follows the Monetary Policy Committee’s unanimous decision to cut the repo rate by 25 basis points to 5.25 per cent on 5 December 2025, while maintaining a neutral policy stance. The Standing Deposit Facility rate now stands at 5.00 per cent, while the Marginal Standing Facility rate and Bank Rate have been adjusted to 5.50 per cent, with the Cash Reserve Ratio unchanged at 3.0 per cent.
To support effective transmission of the rate cut, RBI has announced open market operation purchases of Rs 1 lakh crore in two tranches of Rs 50,000 crore each on 11 December 2025 and 18 December 2025. RBI has also announced a USD 5 billion USD/INR buy-sell swap for a three-year tenor, which is expected to inject around Rs 450 billion of durable liquidity into the banking system.
Inflation has fallen sharply, with headline inflation reported at 0.25 per cent, creating space for accommodative monetary policy even as growth remains strong. RBI has revised its inflation projection for FY26 to 2.0 per cent from its October 2025 estimate of 2.6 per cent, supported by lower food inflation, higher kharif output, healthy rabi sowing and adequate reservoir levels.
Inflation for Q3 FY26 is now projected at 0.6 per cent, while Q4 FY26 inflation is estimated at 2.9 per cent. For FY27, RBI has projected inflation at 3.9 per cent in Q1 and 4.0 per cent in Q2, while SBI Research forecasts full-year inflation at 3.4 per cent.
External Risks Still In Focus
Despite the positive domestic outlook, SBI cautioned that ongoing tariff measures, trade policy uncertainties and prolonged geopolitical tensions could weigh on external demand for goods and services. Volatility in international financial markets, driven by risk-off investor sentiment, also poses downside risks to India’s export-linked growth momentum.
India’s banking system remains sound capitalised, with the capital to risk-weighted assets ratio at 17.24 per cent as of September 2025 and gross non-performing assets falling to 2.05 per cent. Credit growth at scheduled commercial banks stood at 11.3 per cent year-on-year for the fortnight ended 31 October 2025, while deposit growth was reported at 9.7 per cent.
Following a cumulative 100 basis points cut in the repo rate, lending rates on fresh rupee loans have declined by 69 basis points, supporting borrowing and investment activity across sectors. SBI’s projection of over 7 per cent GDP growth in H2 FY26 reflects a combination of resilient consumption, easing inflation, supportive liquidity conditions and a stable banking system, even as global uncertainties remain key variables for the growth outlook. |
