The Reserve Bank of India has raised its GDP growth projection for FY26 to 7.3% while sharply lowering the inflation forecast to 2% amid recent GST rate cuts, a benign outlook on food prices and improved supply conditions.

The optimistic review comes on the back of a higher-than-anticipated GDP growth rate of 8.2% during the July-September quarter and a lower-than-expected retail inflation print of 0.25% in October.

On both these counts, the RBI’s estimates had faltered. The central bank had earlier estimated GDP growth of 6.8% for FY26, based on a Q2 print of 7%. On the inflation front, the projection was 2.6% for FY26 and the central bank also missed the October figure.

Reasons for a higher GDP projection

The first half of the current fiscal brought enough cheer in terms of policy changes and the remaining six months is expected to reap rewards from that.

The first signs of that change got reflected in the October month, with the retail portfolio being upbeat and indicating consumption being on the upswing. State Bank of India, the country’s largest lender, financed 88,160 cars in October amounting to loans worth Rs 7,300 crore.

“We are in a position where we are most likely to surpass our target of Rs 1 trillion of new retail loans (sans home) in FY26. We have achieved 50% of our target till October and the second half is already seeing rapid acceleration. We are also looking to upgrade our targets in gold loans,” Sukhwinder Kaur, SBI’s chief general manager in charge of retail loans,” told Indianbankingnews.com.

The corporate loan side is still slack but bankers expect the momentum to gather steam in the second half of the fiscal and they will be able to post double-digit growth in the year.

The supports laying the ground for economic activity during the first half included rationalisation of income tax and goods and services tax (GST), softer global crude oil prices, front-loading of government capital expenditure, and "congenial monetary and financial conditions" supported by benign inflation.

"High-frequency indicators suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in few leading indicators. GST rationalisation and festival-related spending supported domestic demand during October-November. Rural demand continues to be robust while urban demand is recovering steadily," said Malhotra.

On the supply side, agricultural growth has been supported by healthy Kharif crop production, higher reservoir levels and better Rabi crop sowing.

The central bank also pointed out that the manufacturing activity continues to improve and the services sector is maintaining a steady pace.

Based on all these factors, the RBI has projected GDP growth at 7% (raised from 6.4% estimated earlier) in Q3 of FY26 and 6.5% (from 6.2%) in Q4.

For the first half of FY27, growth is forecast at 6.7% (raised from 6.4% estimated earlier) in Q1 and 6.8% in Q2.

The absence of a trade deal with the US is a negative factor but a breakthrough could lift growth to around 8%, according to Gaura Sengupta, chief economist at IDFC First Bank.

"The tailwind is the goods and services tax (GST) push which can negate and go beyond. This needs to be monitored going ahead," Sabnavis said. Effective September 22, the GST Council approved a two-slab structure of 5% and 18%, which lowered taxes on several household goods and durables.

Why inflation is expected to remain benign

The underlying inflation pressures are lower than headline readings suggest, Malhotra pointed out, adding that higher precious metal prices alone had contributed roughly 50 basis points to the current inflation figure.

The RBI, in fact, has been signalling a disinflationary trend for several months. The central bank’s inflation outlook improved over the course of the financial year, which was first estimated in February at 4.2% for FY26. This forecast was lowered in October to 2.6% for the year and is now placed at 2%.

Malhotra has attributed the downward revision to factors like higher kharif production, healthy rabi sowing, adequate reservoir levels and conducive soil moisture. Barring some metals, international commodity prices are also likely to moderate going forward.

“Overall, inflation is likely to be softer than what was projected in October, mainly on account of the fall in food prices," the RBI Governor said.

The revised quarterly projections are at 0.6% (pegged earlier at 1.8%) for Q3 and 2.9% (4% projected earlier) for Q4. In Q1 of FY27, the new estimate is 3.9% (earlier 4.5%) for Q1 and 4% for Q2.

A softer inflation projection has aided the RBI’s monetary policy committee (MPC) to lower repo rate by 25 basis points to 5.25%. Since February, the key policy rate has reduced by 125 basis points to support growth.

“The headroom provided by the inflation outlook has allowed us to remain growth supportive,” Malhotra said.