The Reserve Bank of India (RBI) lowered its gross domestic product (GDP) growth forecast for 2025-26 (FY26) to 6.5 per cent from 6.7 per cent, citing global trade volatility and policy uncertainties. The decision was announced on Wednesday after the Monetary Policy Committee’s (MPC) 54th meeting, chaired by RBI Governor Sanjay Malhotra.
Malhotra warned that trade frictions and higher tariffs could impede domestic growth, stating, “Dent on global growth due to trade friction will impede domestic growth also. Higher tariffs shall have a negative impact on net exports.” He said the new fiscal year had begun on an “anxious note” due to rising global trade concerns.
India’s GDP projections revised downward
The National Statistics Office (NSO) estimates India’s GDP growth at 6.5 per cent for FY25, following 9.2 per cent growth in FY24. For the ongoing financial year, the NSO has also revised its GDP growth projection to a steady 6.5 per cent growth.
The downward revision was driven by uncertainties in global trade, a weaker external demand outlook, and potential headwinds from financial market volatility. This comes as the United States' reciprocal tariffs come into effect. Indian imports to the US will now face a 26 per cent tariff. A 25 per cent tariff has been levied on auto and auto part imports, with more tariff announcements expected to follow in the coming days. The tariffs have triggered a trade war between the US and China, while also forcing countries to begin fresh trade negotiations with the Trump administration, disrupting supply chains.
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Strong balance sheets can spur growth
Despite external challenges, Malhotra expressed optimism, highlighting rural demand recovery, an uptick in urban consumption, government capital expenditure, and strong corporate balance sheets as key domestic growth drivers.
As the economy moves forward, the recovery of industrial activity, higher capacity utilisation, and the healthy balance sheets of both corporates and banks are expected to further contribute to growth. While merchandise exports may face challenges due to the uncertain global economic landscape, services exports are expected to remain resilient, providing a buffer against global trade disruptions.
On the supply side, agricultural prospects are looking promising, and the services sector is expected to show resilience. Despite this, ongoing global trade disruptions continue to pose risks to the economic outlook, the RBI said.
The RBI’s quarterly GDP growth projections for FY26 are:
Q1: 6.5 per cent (down from 6.7 per cent) Q2: 6.7 per cent (down from 7.0 per cent) Q3: 6.6 per cent (up from 6.5 per cent) Q4: 6.3 per cent (down from 6.5 per cent) India’s inflation outlook strengthens
India’s retail inflation fell to a seven-month low of 3.61 per cent in February 2025, below the RBI’s 4 per cent target for the first time since August 2024. Malhotra credited this to a sharp decline in food prices and record wheat and pulse production.
“The outlook for food inflation has turned decisively positive,” Malhotra said. However, he cautioned that global uncertainties and weather-related disruptions could still pose inflation risks.
For FY26, assuming a normal monsoon, the Consumer Price Index (CPI) inflation is now projected at 4 per cent, revised down from 4.2 per cent.
Quarter-wise CPI inflation projections:
Q1: 3.6 per cent (down from 4.5 per cent) Q2: 3.9 per cent (down from 4.0 per cent) Q3: 3.8 per cent (unchanged) Q4: 4.4 per cent (up from 4.2 per cent) RBI MPC cuts repo rate
The MPC unanimously voted to reduce the repo rate by 25 basis points (bps) to 6 per cent, effective immediately. The decision aligns with the RBI’s neutral policy stance, allowing flexibility to adjust rates as needed. This marks the second consecutive rate cut by the RBI.
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“We are aiming for non-inflationary growth that is built on improved demand-supply response and sustained macroeconomic balance,” Malhotra said, reaffirming RBI's commitment to supporting growth while maintaining inflation stability.
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The Asian Development Bank (ADB) has revised downwards India’s GDP growth forecast for the financial year 2025-26 (FY26) to 6.7 per cent from the earlier 7 per cent in its April 2025 latest outlook report.
“A major risk arises from US tariff levies on India’s and other countries’ exports, which could reduce trade and investment flows and potentially create volatility in the domestic financial market,” the report said.
Global economic uncertainty may also affect completion of investment projects in India, ADB said in its report.
However, ADB in its report highlighted that these risks could potentially be mitigated by a trade agreement between India and US, which is being negotiated and the fact that India’s merchandise exports to the US account for a relatively low 2 per cent of GDP.
Favourable monetary and fiscal policies, rising rural incomes, and moderating inflation would support India’s growth, ADB said.
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The growth for the financial year 2026-27 has been projected at 6.8 per cent in the report.
Addressing food inflation with extreme weather events would be a challenge for India, which ADB said could impose risks on agricultural outlook.
“A structural mismatch between demand and supply trends could give rise to higher food inflation and raise inflationary expectations unless policies are implemented to build resilience into the food supply chain,” the ADB report said.
Meanwhile, Moody’s Ratings said that the newly announced tariffs are likely to upend global trade dynamics. While the new tariffs will hurt the ‘China+1’ strategy, the ratings agency said that Asia Pacific economies may be incentivised to deepen trade and investment ties intra-regionally.
India, it said, may benefit from some trade diversion activity and companies seeking to access large markets while keeping operating costs reasonable. The latter, it said, would only happen over a number of years.
Tariffs cast a shadow on growth prospects
Aggressive US tariffs, which could escalate into a full-blown trade war, pose a significant threat to growth prospects, the report said.
“Full implementation of the April 2 US tariffs, as well as retaliatory measures by US trading partners, would negatively affect the US outlook, but also reduce growth and inflation in the PRC and other regional economies,” the ADB report said.
The economies in developing Asia and the Pacific are projected to grow 4.9 per cent this year, down from 5 per cent last year.
The growth forecasts, ADB said, were finalised prior to the April 2 announcement of new tariffs by the US administration. The forecasts are likely to be lowered further by ADB in its July report.
“Rising tariffs, uncertainties about US policy, and the possibility of escalating geopolitical tensions are significant challenges to the outlook. Asian economies should retain their commitment to open trade and investment, which have supported the region’s growth and resilience,” ADB chief economist Albert Park said.
The report suggested that the policymakers need to account for the negative consequences of retaliation when they consider whether or to what extent they should retaliate. ADB in its report has suggested that countries should negotiate to ease tensions and reduce tariffs as much as possible.
It further said that developing Asian economies should remain committed to open trade and investment, bolstering economic integration, reconfiguring supply chains to adapt to new tariffs, and seeking new trade agreements among themselves and with third countries.
Countries should also consider macroeconomic policy support in cases where tariffs result in a significant slowdown in growth as well as diversify export markets to reduce concentration risk, the ADB report recommended.
“Easing monetary policy could be appropriate since many regional economies now have inflation at or below target. For economies with fiscal space, supportive fiscal measures can be used, especially to assist more vulnerable populations,” the report added.
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