India’s economy picked up momentum in the second quarter of FY26, recording its fastest growth in six quarters, as resilient domestic demand, steady credit flows, and improving fiscal and external metrics helped offset global uncertainties, according to the Reserve Bank of India’s December 2025 Bulletin.
In its State of the Economy assessment, the RBI said high-frequency indicators for November point to sustained economic activity across key sectors, indicating that the slowdown seen earlier in the fiscal year has largely eased. Consumption demand remained firm, while investment activity continued to receive support from benign financial conditions.
Importantly, headline inflation, though rising marginally on a sequential basis, stayed below the RBI’s lower tolerance band, providing policymakers with much-needed room to prioritise growth without immediate price stability concerns. The central bank noted that easing supply-side pressures and stable core inflation trends contributed to the favourable outlook.
Strong Credit Flow and Stable Financial Conditions
The Bulletin highlighted that credit to the commercial sector remained robust, reflecting healthy demand for both consumption and investment financing. Financial conditions were described as “benign,” suggesting that liquidity availability and borrowing conditions continued to support economic expansion.
External Sector Shows Marked Improvement
On the external front, India’s current account deficit (CAD) narrowed in Q2 FY26 compared to the same period last year. The improvement was led by a reduction in the merchandise trade deficit, along with strong services exports and sustained remittance inflows.
The RBI also noted that global uncertainty indicators moderated during the quarter, despite intermittent volatility in equity markets driven by valuation concerns. This easing of external stress, combined with stable domestic fundamentals, helped reinforce India’s macroeconomic resilience.
Fiscal Metrics Improve, Capex Remains a Priority
A separate analysis titled “Government Finances 2025–26: A Half-Yearly Review” pointed to healthy fiscal management by both the Centre and the States. Central government receipts remained broadly aligned with Budget estimates, while capital expenditure growth stayed strong, underscoring continued focus on infrastructure and asset creation.
At the State level, revenue receipts improved despite a decline in central grants, while capital spending gained traction. The RBI observed a rise in the quality of expenditure, with a declining share of revenue expenditure relative to capital outlay.
New Tools and Analytical Insights
The Bulletin also introduced a new Composite Leading Indicator (CLI) for manufacturing GVA, capable of predicting turning points in the manufacturing cycle one quarter in advance using machine learning models. Additionally, an analytical study found that gold remains the most stable safe-haven asset during geopolitical stress, while crude oil is the most sensitive.
Overall, the RBI’s December Bulletin presents a picture of an economy on a firmer footing, with accelerating growth, contained inflation, improving fiscal discipline, and strengthening external balances as FY26 enters its second half.
