The Indian economy is in a good spot with strong growth and low inflation. Inflation remains below the tolerance band and its outlook continues to be benign. Highfrequency indicators suggest continuation of the strong growth momentum in Q3 this year and beyond.
With the signing of a landmark trade deal with the European Union and the US trade agreement in sight, growth momentum is likely to be sustained for a longer period. Global growth supported by tech investments, accommodative financial conditions, and large-scale fiscal stimulus is expected to be marginally stronger this year than projected earlier. However, the confluence of escalating geopolitical frictions and rising trade tensions is unraveling the existing world economic order.
Inflation outcomes are heterogeneous across jurisdictions, remaining above target in most advanced economies, prompting divergence in monetary policy actions as central banks near the end of their current easing cycles. Against a global backdrop that has increasingly become more cautious, bond market sentiments remain bearish, reflecting fiscal sustainability concerns. However, equity markets driven by tech stocks remain upbeat.
The monetary policy committee met on fourth, 5th and today to deliberate and decide on the mor on the policy reporate after a detailed assessment of the evolving macroeconomic conditions and the economic outlook. The MPC voted unanimously to keep the policy repo rate unchanged at 5. 25%.
Consequently, the STF rate remains at 5% and the MSF rate and the bank rate at 5. 5%. The MPC also decided to continue with the neutral stance.
I shall now briefly set out the rationale for the MPC's decisions. The MPC noted that since the last policy meeting external headwinds have intensified though the successful completion of trade deals augers well for the economic outlook. Overall the near-term domestic inflation and growth outlook remain positive.
Headline inflation during November and December remained below the tolerance band of the inflation target. The revised outlook for CPI inflation in Q1 and Q2 of next year at 4% and 4. 2% respectively revised slightly upwards continues to be benign and near the inflation target.
The slight upward revision in the inflation outlook is primarily due to increase in prices of precious metals which contribute about 60 to 70 basis points. The underlying inflation continues to be low. On the growth front, economic activity remains resilient.
The first advanced estimates suggest continuing growth momentum driven by domestic factors amidst a challenging external environment. The growth outlook too remains favorable based on a comprehensive review of the domestic macroeconomic conditions and the outlook. The MPC therefore was of the view that the current policy rate is appropriate and accordingly it voted to continue with the existing policy rate.
It also agreed to retain the neutral stance. Going forward, the MPC will be guided by the evolving macroeconomic conditions and the outlook based on the data from the new series in charting out the future course of monetary policy action. You are all aware that in a few days we will have a new series for both GDP as well as inflation.
I will now dwell on uh the assessment of growth and inflation. First growth. The Indian economy continues on a steady improving trajectory with real GDP poised to register significant higher growth of 7.
4% this year as compared to the previous year. Amidst global headwinds, private consumption and fixed investment both supported growth. Naked external demand however remained a drag with imports outpacing exports.
On the supply side, growth in real GVA on the back of a strong contribution from the services sector and revival in manufacturing activity is estimated at 7. 3% this year. Going forward, economic activity is expected to hold up well in the next year.
Agricultural activity will be supported by healthy reservoir levels, robust rubby sewing and improvement in crop vegetation conditions. Improving corporate sector performance and sustained momentum in informal sector should boost manufacturing activity. Construction sector growth is expected to remain firm.
Services sector should continue to be resilient with strengthening domestic demand. Early results from IT firms suggest an improvement in business activity. On the demand side, the momentum in private consumption is expected to sustain next year.
Rural demand remains steady with improving agricultural activity and rural labor market conditions. Recovery in urban consumption should further strengthen with continued support from GST rationalization and monetary easing among others. High capacity utilization, accelerating bank credit, conducive financial conditions and government's continued emphasis on infrastructure should give an impetus to investment activity.
Moreover, several measures announced in the budget should be conducive for growth. You are all aware that one of the kartav one of the pillars in the budget has been on sustaining growth. The recently concluded India EU FTA and the prospective India US trade deal along with several other trade agreements will support exports over the medium term.
Services exports should remain resilient. The spillovers emanating from geopolitical tensions, volatility in international financial markets and shifting trade patterns pose risks in the outlook. Taking all these factors into consideration, real GDP growth projections for Q1 and Q2 of next year that is 2026 27 are revised upwards slightly to 6.
9% and 7% respectively. The risks are evenly balanced. I may mention that we are deferring the projections for the folure to the April policy as the new GDP series will be released later in the month.
I now come to inflation. Headline CPI inflation remained low in November and December even as it firmed up by 1 percentage point in these two months. This increase was largely driven by the lower rate of deflation in the food group.
Excluding gold, core inflation remained stable at 2. 6% in December. Near-term outlook suggests that food supply prospects remain bright on the back of healthy karif production, sufficient buffer stocks of food grains, favorable rubby sewing and adequate reservoir levels.
Core inflation barring potential volatility induced by prices of precious metals is expected to be rangebound. Geopolitical uncertaintity coupled with volatility in energy prices and adverse weather events pose upside risks to inflation. In terms of the headline inflation trajectory, despite the anticipated momentum being muted, unfavorable base effects stemming from large decline in prices observed during Q4 of last year that is 202425 would lead to an uptick in yearon-year inflation in Q4 this year.
Considering all these factors, CPI inflation for this year, the current year 202526 is now projected at 2. 1% with Q4 at 3. 2%.
CPI inflation for Q1 and Q2 next year are projected at 4% and 4. 2% respectively. Excluding precious metals, the underlying inflation pressures remain muted.
The risks are evenly balanced. Again, in view of the impending release of the new CPI series on February 12, as I mentioned, for growth, we will be presenting our CPI inflation projections for the full year 2026 27 in our next policy statement uh in April. I will now be talking about uh the external sector.
Despite heightened uncertaintity, global trade remained relatively robust. India's merchandise exports supported by trade diversification efforts grew by 1. 9% yearonear in Q3 2526.
Merchandise imports grew by 7. 9% during the same period resulting in a widening of the trade deficit. Robust services exports and healthy inward remittance receipts would however keep India's current account deficit for the current year moderate and sustainable.
Moreover, India's proactive efforts in pursuing bilateral and regional trade agreements with major trading partners are expected to boost international trade and investment. diversify trading partners and integrate India into global value chains. Even on the external financing side, gross FDI to India increased at a robust pace during April to November 2025 for which we have data till now.
Net FDI2 increased as repatriations declined despite a rise in outward FDI. India continues to remain an attractive FDI destination for green field projects as evidenced by a number of announcements made in this regard. However, FBI recorded net outflows of 5.
2 5. 8 sorry billion US till February 3 this year. As on 30th January 2026, India's foreign exchange reserves stood at a very healthy 723.
8 billion US providing a merchandise import cover of more than 11 months. Overall, India's external sector remains resilient. We are very confident of meeting our external financing requirements comfortably.
Now I'll be speaking about the liquidity and the financial market conditions. System liquidity as measured by the net position under the LAP which is the liquidity adjustment facility stood at a surplus of 70,000 cr on a daily average basis since the last MPC meeting in December 2025. There has been an uptick I may mention in February and now it is almost 2 lakh cr rupees.
The Reserve Bank undertook several measures to provide durable liquidity in December and January. Based on assessment of systemic liquidity and its outlook, we announced and undertook further durable liquidity augmenting measures in the second half of January and February 2026. In response to the cumulative 125 basis points cut in the policy repo rate, the weighted average lending rate of scheduled commercial banks has declined over this period till December for which we have data till now by about 105 basis points.
I may mention that the interest rate effect is 94 basis points. Similarly, the weighted average domestic term deposit rate on an average on fresh deposits declined by 95 basis points. This decrease on an outstanding deposit basis is 41 basis points over the same period.
Coming to money markets especially for CPS and CDs that is commercial papers and certific deposits the rates tightened in January 2026 after softening till December as a result of moderation as a result of various factors including moderation in surplus liquidity excess supply from bunching of redemptions in CPS and CDs in January and then there is always the year- end effect in the last quarter of the year. GC yields mirroring global trends have continued to harden over the last 8 months due a due to a host of factors. Going ahead, the Reserve Bank will remain proactive in liquidity management and ensure sufficient liquidity in the banking system to meet the productive requirements of the economy and to facilitate monetary policy transmission.
Liquidity management would be preemptive with sufficient allowance for unanticipated fluctuations in government balances, changes in currency in circulation and forex intervention etc. I'll now talk about uh financial stability. The system level financial stability parameters related to capital adequacy, liquidity, asset quality and profitability of scheduled commercial banks continue to remain robust.
Similarly, the system level parameters of NBFC2 are sound with adequate capital position and improved asset quality. As per latest available data, credit from all sources it has picked up. It grew at 13.
8% as compared to 11. 6% a year ago. It had even come down to 9% in May.
Bank credit uh two recorded an uptick in recent months. This growth is supported by sustained lending to all sectors particularly retail services and MSMES. Large industries also recorded higher credit growth.
Now, as has been the practice, I shall be announcing several measures uh which aim broadly to enhance number one customer protection, number two advance financial inclusion, three enhance the flow of credit, four strengthen the UCBs, promote ease of doing business especially for NBFC's and deepen the financial markets. For customer protection, we will issue three draft guidelines. One related to missselling.
This has been in the works for some time. Two, regarding recovery of loans and engagement of recovery agents. Three, on limiting liability of customers in unauthorized electronic banking transactions.
It is also proposed to introduce a framework to compensate customers up to an amount of 25,000 for losses incurred in small value fraudulent transactions. You are all aware that there has been a number of fraudulent uh transactions for which RB has taken a number of measures and we will again uh in this regard we also now wish to publish a discussion paper on possible measures to enhance the safety of digital payments. Such measures may include lagged credits and additional authentication for specific classes of users like senior citizens.
In the financial inclusion space, we have uh comprehensively reviewed three schemes. The lead bank scheme, the Kissan credit card scheme and the business correspondent model. We shall issue draft revised guidelines with respect to each one of them.
It is also proposed to launch a unified portal uh for better management of the lead bank scheme data. The limit of 10 lakh rupees for collateral free loans to MSMES is proposed to be increased to 20 lakh rupees. This limit has been there for quite some time.
Coming to the real estate sector to further promote financing to real estate sector it is proposed to allow banks to lend to REITs with certain credential safeguards. As I may mention that lending to invits which are similar in structure to REITs is already allowed. Now I have four measures for the urban cooperative banks.
They are an important link in our financial inclusion effort. The first two pertain to raising the financial limits on unsecured loans and loans to nominal members by the UCBs. We also propose to remove the tenor and moratorium related requirements on housing loans given by tier three and tier 4 UCBS.
Then to strengthen the managerial and technical capacity of the UCBs we shall launch a mission which we call Saksham which stands for Sahikari Bank Shamatan. This mission intends to train over 1 lakh 40,000 participants, officials, members, directors from the UCBs. I now come to NBFCs.
There are two measures for them. NBFCs having no access to public funds and having no customer interface with an asset size not exceeding 1,000 cr rupees are proposed to be exempted from the requirement of registration with the Reserve Bank. Moreover, it is proposed to dispense with a requirement for certain NBFCs to obtain prior approval to open more than 1,000 branches.
Coming to financial markets, you are aware we had earlier issued revised draft regulations for ECBS that is external commercial borrowings. These regulations have been finalized. They shall be issued shortly.
We also propose to remove the limit of 2. 5 lakh cr rupees for investments under the voluntary retention route. Investment through this route that is the voluntary retention route in each category of securities.
Central government securities, state government securities, corporate bonds will be subject to the investment ceiling for the respective category under the general route. Furthermore, in pursuance of the announcement made by the finance minister in the union budget of 2026 27, we propose to issue the regulatory framework for derivatives on corporate bond indices and total return swaps on corporate bonds. It is also proposed to issue draft revised guidelines for authorized dealer banks and standalone primary dealers allowing them more flexibility in undertaking foreign exchange transactions.
Now before I conclude I would like to inform that Reserve Bank observes the financial literacy week every year on specific themes of financial education. The campaign this year will be launched on 9th February Monday coming week in continuation of our ongoing endeavor on REKYC of bank accounts. You are aware that we had launched a campaign for REKYC and financial inclusion earlier this financial year.
The theme that we have chosen for this year's uh financial literacy week is KYC your first step to safe banking. I urge all banks as well as participants to actively take part in this campaign. To conclude, the Indian economy continues to register high growth despite a challenging external environment clouded by geopolitical uncertaintities.
Ben benign inflation provides the leeway to remain growth supportive while preserving financial stability. We remain committed to meet the productive requirements of the economy and sustain the growth momentum. Thank you.
Namaskar and Jahind.
