RBI Cuts FY 2025 GDP Growth Forecast to 6.6% Amid Slowing Economy

On December 6, the Reserve Bank of India (RBI) revised its GDP growth forecast for FY 2025 to 6.6%, down from the earlier estimate of 7.2%. The central bank also lowered its growth projections for the 3rd and 4th quarters of FY 2025, estimating 6.8% for Q3 (previously 7.4%) and 7.2% for Q4 (previously 7.4%). For FY 2026, the projections were revised to 6.9% for Q1 (from 7.3%) and 7.3% for Q2.

Governor Shaktikanta Das attributed the revisions to weak domestic activity in recent quarters. He noted, however, that high-frequency indicators suggest that economic activity bottomed out during the second quarter and has since shown signs of recovery, supported by festive demand and improving rural consumption. Despite the revisions, the services sector continues to grow strongly, and rural demand is trending upward, though urban demand shows signs of moderation due to a high base effect.

Inflation Concerns and Repo Rate Decisions

The Monetary Policy Committee (MPC) voted to leave the benchmark repo rate unchanged at 6.5% for the 11th consecutive time, with a 4:2 majority. The central bank also maintained its neutral monetary stance, emphasising a balanced approach to managing inflation and supporting economic growth.

Governor Das spoke about the importance of price stability, stating that it remains crucial for all sectors of the economy.

India’s economic growth faced significant challenges in recent quarters. GDP growth in Q2 FY 2025 slowed to a seven-quarter low of 5.4%, driven by contractions in mining, manufacturing, and utility services. The subdued performance of key sectors, coupled with high inflation and elevated interest rates, has clouded the full-year growth outlook.

Retail inflation surged to 6.21% in October, breaching the RBI’s tolerance band for the first time in over a year, further complicating the case for interest rate cuts to boost growth.

The Governor also highlighted global risks, including rising protectionism, which could push inflation higher and undermine global growth.

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