In FY26, the markets will closely track the implications of Trump's US tariff policies and reciprocal measures by others, as an uncertain policy environment may instill volatility in global financial markets, RBI said.
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."
The US Court of International Trade on 28 May ruled that former 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.
"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.
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.