Why in News?

• The Reserve Bank of India (RBI), in its State of the Economy article, has assessed India’s macroeconomic conditions based on high-frequency indicators (for December 2025).
• The assessment points towards continued growth momentum, resilient domestic demand, and optimism about future prospects, despite elevated global geopolitical and geo-economic uncertainties.
• The views expressed in the article are those of the authors and not the official stance of the RBI.

What’s in Today’s Article?

• Key Growth Signals - Domestic Economy
• Macro-Economic Indicators
• Global Geopolitical and Geo-Economic Risks
• Structural Reforms and Policy Environment (2025)
• External Sector and Trade Strategy
• Challenges and Way Ahead
• Conclusion

Key Growth Signals - Domestic Economy:

• Robust demand conditions: High-frequency indicators suggest sustained buoyancy in growth impulses. Demand conditions remain upbeat, supported by consumption and economic activity.
• Revival of rural demand:
  • Retail automobile sales recorded broad-based growth across categories.
  • Key drivers are GST rate cuts improving affordability, year-end promotional offers, and pre-buying ahead of expected price hikes in January.
• Commercial activity and logistics: Retail commercial vehicle sales maintained strong growth. It indicates improved goods movement, and strong underlying economic activity.
• GST and formal economy indicators: E-way bill generation continued healthy growth due to GST rate rationalisation, stock clearance, and firms pushing year-end sales.

Macro-Economic Indicators:

• GDP growth: (National Statistics Office’s first advance estimate)
  • The real GDP growth is estimated at 7.4% in 2025-26, up from 6.5% a year ago.
• Inflation trends: In December, the consumer price index (CPI) inflation rose to 1.3% driven by a lower rate of deflation in the food group along with an increase in core index.

Global Geopolitical and Geo-Economic Risks:

• Key developments at the start of 2026:
  • US intervention in Venezuela
  • Ongoing Middle East conflict
  • Uncertainty over Russia–Ukraine peace deal
  • Escalation of the Greenland dispute
• Implications:
  • Elevated geo-economic risks
  • High policy uncertainty
  • Potential spillover effects on trade, energy, and capital flows

Structural Reforms and Policy Environment (2025):

• Major reforms highlighted:
  • Rationalisation of tax structures
  • Implementation of labour codes (labour market reforms)
  • Financial sector deregulation
• Expected outcomes:
  • Improved growth prospects
  • Enhanced productivity
  • Strengthened medium- to long-term economic fundamentals 

External Sector and Trade Strategy:

• Export diversification: India has made significant efforts to diversify exports (like focusing on new markets in Africa and Latin America).
• Trade negotiations: Ongoing talks with 14 countries/groups, covering nearly 50 nations, including European Union (EU), Gulf Cooperation Council (GCC), United States.

Challenges and Way Ahead:

• Persisting global geopolitical instability: Strengthen domestic demand while boosting export competitiveness.
• Risk of imported inflation: Tackling imported inflation by a mix of monetary (interest rate cuts), fiscal (reducing import duties) and trade policies (boosting domestic supply chains).
• Balancing growth and inflation management: Maintain a balanced policy approach between innovation vs. stability, and growth vs. consumer protection.
• Ensuring inclusive and sustainable growth: Deepen structural reforms to enhance productivity and resilience.
• Managing policy uncertainty: Continue prudent regulation and supervision.

Conclusion:

• The RBI’s State of the Economy assessment underlines the resilience of the Indian economy, supported by strong domestic demand, improving rural consumption, robust GST indicators, and sustained reform momentum.
• While global uncertainties remain elevated, India’s macroeconomic fundamentals and reform-oriented policy framework provide credible grounds for optimism, positioning the economy for stronger and more stable long-term growth.