Indian Economy Is Growing Even After Inflation Fluctuations?

This article examines recent comments by an RBI panel member, particularly Saugata Bhattacharya, an external member of the Reserve Bank of India’s rate-setting panel, that GDP growth in India is likely to moderate while inflation edges closer to the 4% target. 

We explain the dynamics behind slowing growth prints, current inflation trends, the RBI’s projections for FY26 and FY27, risks from global headwinds, and what this means for India’s macroeconomic policy landscape.

Strong Growth So Far, But Signals Point to Moderation

India’s economy has been a bright spot globally, with real GDP growth beating many peers. In the first half of the current fiscal year (FY 2025-26), real GDP expanded at around 8% YoY, driven by robust manufacturing activity, strong services demand, and resilient private consumption. High-frequency indicators also point to sustained economic activity across several sectors.

However, this strong growth momentum is not expected to continue unabated. A senior member of the RBI’s Monetary Policy Committee (MPC) has recently noted that as inflation gradually moves closer to the RBI’s 4% target, growth is likely to ease from elevated levels and align more closely with medium-term forecasts. This potentially slower growth trend is already being factored into the RBI’s economic projections for the second half of FY 2025-26 and beyond.

This moderation, from exceptionally high near-term growth prints to more sustainable longer-term rates, reflects the balancing act policymakers face between containing inflationary pressures and supporting economic expansion.

Why GDP Growth May Moderate as Inflation Nears 4%?

The Reserve Bank of India is mandated to prioritise price stability, with an inflation target of 4% ± 2% under India’s flexible inflation-targeting framework. As headline inflation inch closer to the 4% midpoint over the next few quarters, RBI panel members expect output growth prints to “slow in line with the forecasts in the MPC resolution” rather than remain at elevated early-year rates.

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Real GDP growth in H1 FY26 averaged about 8%, a faster pace than many forecasts anticipated, supported in part by low consumer price inflation and occasionally negative wholesale price inflation, which may have boosted real activity temporarily. However, this strong statistical prints are not expected to be fully sustained as base effects fade and some cyclical headwinds assert themselves. 

The RBI’s internal projections, as shared in its December 2025 policy announcement — suggest that growth in the second half of FY 2025-26 will be slower, with forecasts around 7% in Q3 and 6.5% in Q4. Forward-looking indicators also point to moderate GDP prints in early FY27 (about 6.7–6.8% in Q1 and Q2).

This trend of moderation is a response not just to inflation dynamics but also global economic conditions, trade uncertainties, and the need to avoid overheating the economy by keeping monetary policy calibrated.

India’s Growth & Inflation Indicators: A Comparative Snapshot

The following table summarises key recent macroeconomic data on GDP growth, inflation, and RBI projections. The goal is to give readers a clear context of where India stands now versus where it is headed.

GDP Growth & Inflation Indicators (Recent & Projected)
 

India’s GDP has been growing strongly, with H1 FY26 prints exceeding 8%. This has been partly due to benign inflation, which supported real spending and investment. However, as inflation is forecast to normalise toward the target, output growth is expected to moderate, shifting from very high outturns towards more sustainable rates that balance price stability with economic expansion.

3. Inflation Trends and Policy Implications

India has recently experienced exceptionally low inflation, with CPI readings at historic sub-1% levels in late 2025. This extraordinary low inflation has given policymakers room to lower real interest rates and keep monetary conditions accommodative. Indeed, at the December MPC meeting, the RBI cut the repo rate by 25 basis points to 5.25%, reflecting confidence that inflation remains under control and that supportive policy can sustain demand.

Yet this benign inflation outlook also presents a paradox: while low inflation supports growth in the short run, it may also signal weak demand conditions in certain segments (food prices, rural consumption) or global pressures (supply chain effects).

As inflation edges back toward the 4% midpoint in parts of FY27, the RBI may need to recalibrate policy — potentially pausing rate cuts or even tightening if upside risks materialise. Monetary policy is therefore expected to remain data-dependent, with each MPC decision evaluated meeting by meeting.

The evolving inflation trajectory will be central in shaping policy responses: too aggressive an easing could stoke inflation expectations, while too cautious an approach might dampen growth recovery, especially in the face of global trade tensions and slowing external demand.

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Risks to Growth: Global Headwinds & Structural Challenges

While domestic growth remains resilient, several risks could temper the outlook:

• Global trade uncertainties — tariffs and protectionist policies abroad are seen as drags on Indian exports and manufacturing momentum. Some RBI panels have flagged such factors as key downside risks.
• External demand slowdown — global economic sluggishness could reduce export opportunities, affecting sectors reliant on overseas markets.
• Commodity price volatility — while crude oil has been relatively stable, geopolitical shocks could disrupt prices and feed inflation pressures.
• Investment slowdowns — if private investment growth weakens, it could impact long-term productive capacity.

These risks suggest that the anticipated moderation in growth is not just a statistical projection but a response to real structural and cyclical headwinds.

Conclusion

India’s economy has exhibited impressive growth performance, with near-double-digit GDP prints in recent periods supported by benign inflation and strong demand. However, as inflation trends gradually converge toward the RBI’s 4% target, output growth is expected to moderate, from high near-term rates to more balanced longer-term growth.

The RBI’s carefully calibrated policy, including recent rate cuts, reflects a prioritisation of macroeconomic stability without stifling recovery. Yet the trajectory ahead will critically depend on inflation developments, global trade dynamics, and domestic demand patterns. 

Policymakers will have to navigate this complex terrain with data-driven, nuanced decisions in the months leading into FY27.

India’s medium-term growth outlook remains positive, but moderation from peak momentum underscores a maturing economy that must balance inflation control with sustainable expansion.
 

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