The Reserve Bank of India has expressed confidence in the country's economic trajectory, projecting that India will maintain its status as the world's fastest-growing major economy despite mounting global uncertainties. The central bank's January bulletin highlighted optimistic growth prospects while acknowledging the challenges posed by escalating geopolitical tensions and trade policy uncertainties.

Economic Growth Projections

The RBI's economic researchers, guided by deputy governor Poonam Gupta, have projected India's GDP growth at 7.4% for 2025-26, representing a significant improvement from 6.5% in the previous year. This growth trajectory is expected to be driven primarily by domestic factors, with manufacturing sector rebound and continued services sector buoyancy supporting overall economic expansion.

Current Economic Indicators

High-frequency indicators for December demonstrated continued momentum in growth impulses, with demand conditions remaining robust across sectors. The economic resilience is particularly evident in the resurgence of rural demand and gradual recovery in urban consumption patterns. However, net exports have acted as a drag on growth, reflecting the impact of global trade tensions and tariff impositions.

The flow of financial resources to the commercial sector has increased substantially over the past year, with both banking and non-banking sources contributing to credit expansion. This enhanced credit availability has provided the necessary boost to economic activities across various sectors.

Global Challenges and Policy Response

The year 2026 began with significant geopolitical tensions, including US intervention in Venezuela, conflicts in the Middle East, and uncertainty surrounding the Russia-Ukraine peace negotiations. These developments have created elevated geo-economic risks and policy uncertainty globally.

Despite these challenges, RBI researchers maintained their positive outlook, stating that "the current state of the economy provides ground for optimism going forward."

Export Diversification Strategy

India has intensified efforts to diversify its export portfolio and strengthen trade relationships globally. The country is currently engaged in trade negotiations with 14 countries or groups, representing nearly 50 nations. Key negotiation partners include:

• European Union
• Gulf Cooperation Council countries
• United States
• Various bilateral partners

December marked significant progress with the conclusion of trade negotiations with New Zealand and Oman, expanding India's trade partnership network.

US Tariff Structure Impact

The United States has implemented a comprehensive tariff structure affecting Indian exports, creating substantial trade barriers:

Additionally, the US has announced an extra 25% tariff on countries continuing trade relationships with Iran, further complicating the global trade environment.

Future Policy Focus

The RBI emphasized that future policy initiatives should focus on balancing innovation with stability, ensuring consumer protection, and maintaining prudent regulatory approaches. This strategic framework is expected to improve productivity and support sustainable long-term economic growth while navigating the complex global economic landscape.

The Reserve Bank of India significantly reduced its foreign exchange market intervention in November, net selling $9.70 billion compared to $11.80 billion in the previous month, as the central bank worked to manage rupee depreciation pressures.

Currency Performance and Central Bank Intervention

The Indian rupee experienced notable weakness during November, depreciating by over 0.70% as market pressures mounted. The RBI's intervention through dollar sales represents a key monetary policy tool used to prevent excessive volatility in the currency markets.

Real Effective Exchange Rate Trends

India's real effective exchange rate, which represents the weighted average of the rupee against a basket of six major international currencies, showed a declining trend in recent months. The REER decreased to 94.20 in December from 96.17 in November.

Market Implications

The reduction in RBI's dollar sales from October to November suggests a measured approach to currency management, balancing intervention needs with market dynamics. The central bank's foreign exchange operations remain a critical component of India's monetary policy framework, particularly during periods of currency volatility.

The REER decline indicates that the rupee has weakened not just against the dollar but across multiple major currencies, reflecting broader economic pressures on the Indian currency. This comprehensive measure provides insight into the rupee's overall competitiveness in international markets.