The Indian economy maintained a strong and steady growth trajectory in 2025-26 despite heightened external shocks, particularly following the imposition of higher US tariffs in April 2025, according to the Reserve Bank of India’s (RBI) Annual Report 2025-26 released on Friday.  

The RBI said India continued to remain the world’s fastest-growing large economy, supported by robust macroeconomic fundamentals and proactive policy measures. “Economic activity was bolstered by steady growth in consumption and investment on the demand side, and a buoyant services sector and improvement in industrial activity on the supply side,” the report said.  

Aggregate demand, measured by gross domestic product (GDP) at constant prices, grew 7.6% in 2025-26, up from 7.1% in the previous year. The central bank said growth was largely driven by domestic factors, particularly private consumption and fixed investment.  

The report noted that steep US tariffs on trading partners initially raised concerns about a possible drag on India’s external sector and overall GDP growth. However, adverse spillovers remained limited, with net exports exerting only a marginal drag of 0.1 percentage points during the year. 

Private final consumption expenditure, the key driver of aggregate demand, expanded 7.7% in 2025-26 compared with 5.8% a year earlier. The RBI attributed the improvement to steady rural consumption and a recovery in urban demand, partly aided by income tax cuts and goods and services tax (GST) rationalisation measures. 

Government final consumption expenditure remained steady at 6.6%. 

On the investment front, gross fixed capital formation grew at a robust pace of 7.1% in 2025-26, compared with 6.4% in the previous year. The RBI said sustained government capital expenditure played a counter-cyclical role by crowding in private investment. 

The report also highlighted that India’s sovereign credit rating upgrade in August 2025 strengthened investor confidence, while corporate earnings improved during the year amid strengthening demand conditions.   

The gross domestic investment rate remained broadly stable at 34.3% of GDP in 2024-25.   

Gross domestic savings rose to 34.2% of gross national disposable income (GNDI) in 2024-25 from 32.3% a year earlier. Net household financial savings increased to 7% of GNDI from 5.8%, aided by a sharp decline in household financial liabilities.   

According to the RBI, the narrowing of the savings-investment gap indicated reduced dependence on external capital and lower vulnerability to external shocks. 

Industrial sector 

Industrial sector gross value added (GVA) growth surged to 9.5% in 2025-26, led by manufacturing activity. Manufacturing, which accounts for around 80% of the industrial sector, recorded broad-based growth, with 16 of 23 industry groups expanding during the year. 

The RBI said renewable energy generation, including large hydro, grew 18.4% year-on-year in 2025-26. By end-March 2026, India’s non-fossil fuel energy capacity reached 283 GW, accounting for 53.2% of total installed power capacity, enabling the country to achieve its COP26 target ahead of schedule. 

Capacity utilisation in manufacturing improved to 75.6% in the third quarter of 2025-26, indicating improving business confidence and stronger demand conditions. 

Private sector net fixed asset growth recovered during the year, driven by sectors such as telecommunications, metals, construction and automobiles.  

The production-linked incentive (PLI) scheme continued to support investments, attracting over ₹2.2 lakh crore in actual investment by December 2025, generating incremental production and sales worth over ₹20.4 lakh crore and creating more than 14.4 lakh jobs, the report said.  

Services sector 

The services sector growth strengthened to 8.7% in 2025-26, driven by broad-based expansion across trade, transport, hospitality, financial services, real estate, and professional services.  

Several high-frequency indicators improved in the second half of the fiscal following GST 2.0 reforms, including commercial vehicle sales, vehicle registrations, domestic air cargo, railway freight traffic, foreign tourist arrivals and GST e-way bills. However, some indicators such as air passenger traffic, toll collections and hotel occupancy showed moderation during the period.  

The RBI noted mixed trends in the construction sector, with moderating steel consumption but improving cement production. Housing launches accelerated in the third quarter of 2025-26, supported by GST-led cost reductions, although sales moderated after modest growth in the previous quarter.  

Labour market 

On employment, the central bank said labour market conditions remained steady in 2025. According to the Periodic Labour Force Survey (PLFS), labour force participation rate (LFPR), worker population ratio (WPR) and unemployment rate (UR) recorded marginal declines during the year.  

The RBI said recently enacted labour reforms are expected to improve labour market flexibility, reduce compliance burdens and encourage formal job creation while strengthening worker welfare and social security coverage.  

On the global economy, the report said world economic growth remained resilient at 3.4% in 2025 despite geopolitical tensions and trade uncertainties, supported by technology investments, fiscal and monetary support, and accommodative financial conditions.  

Global inflation moderated to 4.1% from 5.8% a year earlier, although elevated services costs persisted.  

The RBI noted that financial market volatility intensified towards the end of March 2026 following the outbreak of conflict in West Asia, which also exerted upward pressure on sovereign bond yields amid concerns over energy-driven inflation.  

Despite global uncertainties, the central bank said India’s macroeconomic fundamentals remained resilient, supported by moderating inflation, fiscal consolidation, resilient financial markets, a modest current account deficit and adequate foreign exchange reserves.