Global threats pose risks to India's economic growth: RBI annual report

Mumbai: A rise in input cost pressures in the manufacturing sector, global protectionism in trade policies, geopolitical tensions and subdued demand pose risks to India’s economic growth, the Reserve Bank of India (RBI) said in a report on Thursday. 

RBI’s annual report for FY25 said India’s economic activity picked up pace in the second half of the last financial year on the back of an uptick in domestic demand, increase in exports of goods and services, and a buoyant agriculture sector.

The global environment has been tough, with tariffs creating a great deal of uncertainty, it said. US President Donald Trump came to power on 20 January, promising stiff tariffs on friends and foes, industrial jobs revival and a loose fiscal policy. In April, he announced reciprocal tariffs on a host of nations, only to announce a three-month pause soon after.

The central bank said in FY26, markets will closely track the implications of tariff policies of the US and reciprocal measures by others, as an uncertain policy environment may instil volatility in global financial markets. 

“Following a correction in the second half of 2024, Indian equity markets are expected to remain resilient amidst stable macroeconomic conditions and moderation in equity market valuations, although geopolitical uncertainty poses downside risk.”

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The US Court of International Trade on 28 May ruled that President Donald Trump’s baseline tariffs and country-specific duties were illegal, as they were not justified under the International Emergency Economic Powers Act. Experts say the blocking of Trump's tariffs is positive news for the markets.

Macroeconomy

According to the RBI, the domestic economy showed resilience during 2024-25. This was supported by robust “macroeconomic fundamentals and proactive policy measures, amidst persisting geopolitical tensions and geoeconomic fragmentation”. 

It said that headline inflation moderated, although the pace of disinflation was hurt by elevated and volatile food inflation. 

“Deposit and credit exhibited double-digit growth. Fiscal consolidation continued both at the centre and state levels. The continued strength of the external sector, as reflected in adequate forex reserves and modest current account deficit, supported macroeconomic and financial stability,” it said. 

The Indian economy is poised to sustain its position as the fastest-growing major economy during FY26, supported by a pickup in private consumption, healthy balance sheets of banks and corporates, easing financial conditions, and the government’s continued thrust on capital expenditure, according to the Reserve Bank of India.  

On RBI’s agenda for the current financial year is also issuance of harmonised regulations on ‘Income Recognition, Asset Classification and Provisioning Pertaining to Advances’ for all regulated entities, a comprehensive review of all non-fund based contingent facilities issued by lending institutions, issuance of draft guidelines on Standardised Approach for credit risk, prudential guidelines on climate risk for banks, and guidelines on sustainability linked loans.

“The easing of supply chain pressures, softening of global commodity prices and higher agricultural production on the back of a likely above-normal south-west monsoon augur well for the inflation outlook in 2025-26,” the central bank said.

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Episodes of volatility

Uncertainty regarding the evolution of trade tariff policies could lead to “sporadic episodes of volatility” in global financial markets. Further, the export sector is also expected to encounter some headwinds from rising geopolitical tensions, inward-looking policies and the risk of a potential tariff war among major economies. 

Even so, India’s participation in 14 free trade agreements (FTAs) and six preferential trade agreements (PTAs), along with the new trade deals under negotiation with the US, Oman, Peru and the European Union (EU) may support growth in trade.  

“Resilient services exports and inward remittances are likely to cushion CAD (current account deficit), which would remain eminently manageable in 2025-26,” the report.

The outlook for the Indian economy remains "promising” in FY26 supported by revival in consumption demand, easing financial conditions, continuing resilience of the services sector and strengthening of consumer and business optimism, besides sound macroeconomic fundamentals.  

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Farm prospects

The prospects for the agriculture sector appear favourable as well in FY26 on the back of expected above-normal south-west monsoon and productivity-enhancing government policies announced in the Union Budget. 

These schemes include Prime Minister Dhan-Dhaanya Krishi Yojana10; Mission for Aatmanirbharta (self-reliance) in pulses, comprehensive programme to promote production, efficient supplies and processing of vegetables and fruits, launch of National Mission on High Yielding Seeds, Mission for Cotton Productivity, and enhancement of credit limit under the modified interest subvention scheme from ₹3 lakh to ₹5 lakh for loans taken through the kisan credit card (KCC).  

With rising global demand for organic produce, efforts are also being made towards promoting sustainable farming, including a plan to cover one crore farmers under the National Mission on Natural Farming, to enhance the climate resilience of the agriculture sector as well as soil health and biodiversity.

Global scenario

The RBI said the global economic expansion was steady in 2024 but was uneven. Financial conditions turned less restrictive as major central banks embarked on monetary policy easing, it said. 

Global gross domestic product (GDP) grew 3.3% in 2024, as compared to 3.5% a year ago. 

“Global inflation eased to 5.7% in 2024 from 6.6% a year ago as the effect of monetary tightening took hold along with the easing of supply chain pressures; however, it was still above the pre-pandemic average, with elevated services inflation persisting in some major advanced economies,” it said. 

Against this challenging global economic landscape, the Indian economy remained resilient, supported by robust macroeconomic fundamentals and proactive policy measures, as per RBI’s annual report. 

“Although real gross domestic product (GDP) growth moderated to 6.5% in 2024-25, India remained the fastest growing large economy.”

Mint reported on 27 May that despite global turbulence, India’s economy remains resilient and a prime investment destination, with structural reforms and skill-driven policies poised to boost investor confidence, citing the finance ministry’s April economic review.

Rising GST collections, higher e-way bill generation, improved consumer sentiment, and strong growth in services indicated strengthening economic activity, while rural demand remained steady with increased household consumption, the monthly report added.

What experts say

Experts said trends highlighted in the annual report showed there is a possibility of a 25 basis point (bps) cut in the repo rate in the June monetary policy committee meeting. This calendar year, RBI has lowered the repo rate by 50 bps and is expected to go for more cuts on the back of favourable inflation numbers.

India’s inflation measured on the consumer price index (CPI) eased in April to its slowest in over six years and well within the RBI's flexible inflation target of 2-6%. Retail inflation stood at 3.16% year-on-year in April, down from 3.34% in March, 3.61% in February, and 4.83% in the same month last year.

“The continued low rate of inflation below the target rate of 4% in the recent past accompanied with the projected moderation of commodity prices world over, in 2025 as estimated by the World Bank, is expected to prompt RBI to further shift its focus away from inflation control,” said Jyoti Prakash Gadia, managing director at investment bank Resurgent India.

Meanwhile, RBI’s balance sheet grew 8.2% to ₹76.3 trillion as on 31 March. The increase on the assets side was due to a rise in gold, domestic investments and foreign investments by 52.09%, 14.32% and 1.7%, respectively. On the liabilities side, expansion was led by an increase in notes issued, revaluation accounts, and other liabilities by 6.03%, 17.32% and 23.31%, respectively.

However, as a percentage of GDP, RBI’s balance sheet size moderated to 22.8% at the end-March 2025, from 23.5% at end-March 2024, which RBI said mirrors what is being seen in other economies.

On 23 May, the central board of RBI decided to transfer a record ₹2.69 trillion as surplus to the government for the fiscal year 2024-25. The payout is 27% higher than what it had transferred in the previous financial year.

FY26 agenda

During FY26, the RBI's monetary policy department will review the monetary policy framework, study the monetary policy transmission process, revisit the optimal level of system liquidity for effective monetary policy transmission, and undertake a spatial and cross-sectional analysis of the National Sample Survey Organisation’s household consumption expenditure data.

The central bank also plans to review the financial inclusion index (FI-Index), strengthen MSME outreach and inclusion, ensure better aggregation and transparency under the legal entity identifier (LEI) requirements for reporting of OTC derivative transactions, implement global identifiers for OTC derivative transactions, and expand the reach of FX-Retail platform and link it with NPCI’s Bharat Connect platform. 

The regulator will also undertake foreign exchange operations to curb excessive volatility in the USD/INR exchange rate, and conduct policy-oriented research and analysis on financial markets to guide market operations strategies on an ongoing basis.

The Financial Stability Department of the RBI will look to enhance the stress testing framework further, including developing an in-house liquidity stress test framework for NBFCs during FY26. Further, the macro stress tests will be extended to urban co-operative banks in tier-3 and tier-4 cities. 

The department also plans to assess the impact of climate transition risk on major carbon intensive sectors and its impact on balance sheets of banks having exposure to emission intensive sectors.

“A ‘growth-at-risk’ model will be developed for understanding how financial conditions and the level of financial vulnerabilities contribute to the possibility of future episodes of weak economic growth by linking current macrofinancial conditions to the distribution of future growth,” RBI said.

“A cautionary note in the report was the call-out for continued enhancements to stress testing, the need to maintain adequate liquidity buffers, and the need for more attention towards cybersecurity, outsourcing and operational risk management and resilience, particularly the management of risks relating to collaborative lending models,” said Vijay Mani, partner, banking & capital markets leader, Deloitte India. 

As such, overall, the report calls for a cautiously optimistic FY26 outlook for the banking and NBFC sector, Mani added.