RBI Bulletin August 2026

 

Executive Summary & Key Statistical Indicators

(Source: RBI Bulletin - August 2026 Release)

The domestic economy displays resilient momentum driven by robust domestic demand, expanding industrial/services activity, and recovering foreign capital flows, despite global trade uncertainties and headline food inflation.

1. Consumption & Demand Metrics (July 2026 Data)

• Retail Automobile Sales: Increased by 25.9% year-on-year (YoY).

• Rural Spending: Tractor sales surged 28.1% YoY; two-wheeler sales grew 28.3% YoY.

• Fiscal/Tax Collections: Goods and Services Tax (GST) revenues expanded 15.4% YoY.

2. External Trade & Balance of Payments

• Merchandise Exports: Rose 19.6% YoY (strongest monthly export performance in 4 months), led by petroleum products, electronics, and engineering goods.

• Merchandise Imports: Rose 17.5% YoY.

• Trade Deficit: Widened to US$ 32 billion.

3. Labour Market Dynamics

• Unemployment Rate: Increased from 5.0% to 5.4% in the Q1 FY2026–27 quarter (April–June), with noticeable slack in rural areas before seeing a partial recovery in July.

4. Inflation Metrics

• Headline CPI Inflation: Rose to 4.45% in July (above the 4.0% target), primarily driven by volatile food & beverage prices.

• Core Inflation (ex-food & fuel): Stood unchanged at 3.9%.

• Core Inflation (ex-precious metals): Measured considerably lower at 2.7%.

The inaugural address, titled "Winning in the AI Era: The New Playbook for Indian Banks," was delivered by Shri Sanjay Malhotra, Governor, Reserve Bank of India, at the FIBAC 2026 Conference in Mumbai (published in the RBI Bulletin, August 2026).

Here is a comprehensive summary of the speech structured around its core themes:

1. AI as a Strategic Imperative, Not Just Technology

• A Fundamental Paradigm Shift: AI is not simply a piece of software to be procured or an IT project; it represents a new operational model for banks—fundamentally altering how risk is evaluated, capital is priced, customers are served, and institutions are organized.

• The "Intelligence Multiplier": While past industrial revolutions multiplied physical power (steam), energy (electricity), and connectivity (internet), AI multiplies intelligence. It enables institutional decision-making at a scale and speed no human workforce can match.

• Building on Digital Public Goods: India’s Digital Public Infrastructure (Aadhaar, UPI, Account Aggregator, Unified Lending Interface - ULI) provides a foundation. Layering AI over this stack can make financial judgment instant, granular, and accessible to the last mile.

2. Five Core Drivers for AI Adoption in Indian Banking

1. Revolutionizing Credit Delivery: Standard underwriting requires existing credit histories. AI models trained on alternative data (GST filings, cash flows, utility bills, digital footprints) can bring underserved, new-to-credit borrowers and MSMEs into formal banking at a fraction of the cost.

2. Augmenting Customer Service: Empowering relationship managers with predictive AI tools and improving automated grievance redressal while maintaining personalised service.

3. Driving Financial Inclusion: Multilingual voice interfaces remove language barriers for rural/tier-3+ users, while early-warning predictive models help banks counsel borrowers before default occurs.

4. Improving Operational Efficiency & Compliance: Automating labor-intensive tasks (document processing, reconciliation, regulatory return filing, internal audit sampling) lowers intermediation costs and reduces human error.

5. Countering AI-Driven Cyber Fraud: Traditional rule-based engines move too slowly against automated fraud attempts. Real-time machine-learning models (e.g., platforms like MuleHunter and the Digital Payments Intelligence Platform) are required to catch pattern anomalies instantaneously.

3. The 7 Critical Risks Identified by the Central Bank

The Governor highlighted seven key risks that bank boards and executives must actively govern:

• The "Black Box" Problem: Machine learning opacity makes explaining adverse credit decisions difficult to borrowers, auditors, and regulators.

• Algorithmic Bias: Training models on historical data risks perpetuating past discrimination (geographical, occupational, or social).

• Concentration & Systemic Herding: Heavy reliance on a small cluster of dominant foundation models or third-party vendors can lead to shared systemic failures or synchronized market panic.

• Vendor & Third-Party Reliance: Banks must maintain strict vendor oversight, retaining full audit rights, explainability expectations, and exit strategies.

• Privacy & Security Risks: Mandates strict adherence to the Digital Personal Data Protection (DPDP) Act as a baseline floor, not a ceiling.

• Cyber Vulnerabilities: Exposure to data poisoning, model manipulation, and adversarial inputs designed to bypass risk engines.

• Erosion of Human Judgment: The ultimate responsibility remains with human management. "The model decided" is never an acceptable response to regulators or customers.

4. Immediate Priorities for Banking Boards

The RBI expects institutions to implement five immediate structural measures:

1. Maintain a Full AI Inventory: Track every AI application currently running across internal and third-party vendor systems.

2. Establish Board-Approved AI Governance: Ensure explicit accountability mechanisms beyond basic IT procurement.

3. Ensure Model Explainability: Build systems capable of explaining credit denial or fraud detection outcomes.

4. Red-Team & Stress-Test Models: Periodically test algorithms against adversarial inputs prior to and post-deployment.

5. Preserve Human Oversight: Enforce human-in-the-loop controls where AI decisions could cause material financial harm.

Conclusion & Regulator Stance

The RBI reiterated its commitment to a principles-based, consultative, and agile regulatory approach (guided by the FREE-AI Committee framework and draft Model Risk Management guidelines), while maintaining regulatory sandboxes for testing high-impact innovations. Ultimately, the banks that succeed will not necessarily be those that adopt AI fastest, but those that combine technology deployment with strict accountability and customer trust.

 The keynote address titled "India's Foreign Exchange Markets: Getting Ready for the Next Decade" was delivered by Shri Rohit Jain, Deputy Governor, Reserve Bank of India, on the Annual Day of the Foreign Exchange Dealers' Association of India (FEDAI) on August 14, 2026 (published in the RBI Bulletin, August 2026).

1. Historical Transformation & Key Market Statistics

• Shift from FERA to FEMA: The enactment of the Foreign Exchange Management Act (FEMA) in 2000 shifted the core paradigm from conserving a scarce resource through control to facilitating trade and payments.

• Growth in Reserves: Foreign exchange reserves expanded from US$ 38 billion in 2000 to US$ 691 billion in 2026.

• Turnover & Volume Expansion:

  • Average daily turnover in the domestic forex market (spot + derivatives) doubled from US$ 41 billion in FY22 to US$ 80 billion in 2026.

  • The latest BIS Triennial Survey estimated total daily INR turnover (onshore + offshore) at US$ 185 billion in 2025 (up from US$ 119 billion in 2022).

  • Interbank trading accounts for roughly 70% of onshore volume, indicating deep bank-led price discovery.

  • Non-Deliverable Forward (NDF) offshore turnover reached about US$ 7 billion per day, with a narrowing spread between onshore and offshore pricing.

  • Notional outstanding in rupee derivatives grew to nearly ₹130 lakh crore.

2. Four Drivers Shaping the Next Decade

The Deputy Governor outlined four key strategic pillars for the future evolution of India's forex markets:

1. Expanding Market Infrastructure & Access: Transitioning toward dynamic, technology-driven execution platforms that allow seamless access for both domestic retail clients and international institutional investors while deepening liquidity.

2. Product Innovation vs. Risk Mitigation: Ensuring genuine economic activities (trade, investment, hedging) have access to modern risk-management tools (swaps, options, NDFs, extended trading hours), while strictly curbing leveraged speculation and opaque conduct.

3. Harmonization of Onshore & Offshore Markets: Reducing structural gaps between domestic markets and offshore INR centers (including GIFT City) to ensure price discovery remains anchored domestically.

4. Democratization of FX Services: Ensuring that small and medium enterprises (MSMEs), retail traders, and individual remitters receive transparent, low-cost, and efficient foreign exchange services, moving away from high margins historically charged to smaller clients.

3. Regulatory Vision & Call to Action

• Delegated Governance: Over the past two decades, regulation has moved from micro-approvals to delegated decision-making by Authorised Dealer (AD) banks based on clear, principles-based guidelines.

• Customer-Centric Execution: The RBI emphasized that the success of future forex reforms will not be measured by the number of regulations removed or products launched, but by the transparency, cost reduction, speed, and fairness experienced by the end user (especially retail and MSME clients).

The article titled "State of the Economy", published in the RBI Bulletin (August 2026), provides a comprehensive macro-assessment of India's economic performance as it transitions into Q2 FY2026–27.

Despite global headwinds—including geopolitical frictions in West Asia, fresh US tariffs, and international trade uncertainties—the domestic economy continues to display strong resilience driven by internal demand and rebounding capital flows.

1. Domestic Demand & Sectoral Drivers

• Consumption Momentum:

  • Rural Demand: Vehicle demand surged in July 2026, with tractor sales up 28.1% YoY and two-wheeler sales expanding 28.3% YoY, signaling improved rural purchasing power.

  • Urban Demand: Overall retail automobile sales jumped 25.9% YoY, supported by steady passenger vehicle sales.

• Industrial & Business Activity:

  • Manufacturing and services PMI indicators showed sustained expansion, supported by solid corporate profitability and business expectations.

  • Goods movement, electricity demand, and petrol/diesel consumption recorded robust expansions.

  • GST revenues registered a 15.4% YoY growth in July.

2. Trade & External Sector Dynamics

• Merchandise Rebound: Merchandise exports expanded 19.6% YoY (highest single-month value in four months), led by engineering goods, petroleum products, and electronics.

• Import & Trade Deficit: Imports grew 17.5% YoY, bringing the trade deficit to US$ 32 billion, primarily driven by critical industrial inputs, energy, and electronics.

• Sectoral Divergence: While technology and heavy industry exports expanded, employment-intensive segments (garments, leather, gems, and jewelry) experienced contractions.

• US Tariff Impact: The article notes that the recently announced US Section 301 additional 10% tariffs will have a limited impact on India relative to regional peers (China, Vietnam, Thailand), as key Indian exports like smartphones, pharmaceuticals, and petroleum remain excluded.

3. Inflation Trajectory & Agri-Risks

• Headline vs. Core Inflation: Headline CPI inflation edged up to 4.45% in July, breaking past the 4.0% target. However, this was driven almost exclusively by supply-side food and beverage prices (rice, wheat, pulses, edible oils).

• Core Subdued: Core inflation (ex-food & fuel) remained anchored at 3.9% (and dropped to 2.7% when excluding precious metals), confirming limited broad-based cost pass-through.

• Monsoon Risks: Although a July monsoon recovery aided Kharif sowing, the IMD's forecast of below-normal rainfall for the August–September period poses ongoing risks to food supply chains and input costs.

4. Financial Conditions & Capital Flows

• Capital Inflow Rebound: Foreign Portfolio Investors (FPIs) turned net buyers in July, reversing four consecutive months of net outflows, and injected US$ 1.9 billion into Indian equities in early August.

• FDI Flows: Foreign Direct Investment (FDI) net inflows picked up in June and July, with Singapore, the US, the Netherlands, and Canada driving 74% of equity inflows—primarily into manufacturing, renewable energy, and technology.

• Banking & Market Liquidity: System liquidity eased into a comfortable stance, supporting high credit growth and softening Government Securities (G-Sec) yields.

Key Takeaways & Policy Focus

Sector	Outlook & Risk Profile
Growth	Resilient; supported by rural recovery, sustained services, and industrial expansion.
Inflation	Food-driven upward pressure; core inflation remains muted and well-contained.
External Risk	Trade deficit widening and uneven monsoon risks counterbalance positive FPI/FDI inflows.

The Monetary Policy Committee (MPC) met from August 3 to 5, 2026 (62nd meeting), chaired by RBI Governor Sanjay Malhotra. The committee voted unanimously (6-0) to maintain status quo across interest rates and policy stance.

1. Key Policy Decisions & Policy Corridor

• Policy Repo Rate: Maintained at 5.25%.

• Standing Deposit Facility (SDF) Rate: Unchanged at 5.00%.

• Marginal Standing Facility (MSF) & Bank Rate: Unchanged at 5.50%.

• Monetary Policy Stance: Retained as "Neutral" to allow flexibility as macroeconomic risks evolve.

2. Revised Macroeconomic Projections (FY 2026–27)

The MPC made minor revisions to its annual targets compared to the June 2026 policy review:

Indicator	FY 2026–27 Target	Trend / Adjustment	Quarterly Breakdown
Real GDP Growth	6.7%	Up by +10 bps (from 6.6%)	Q1: 7.0%, Q2: 6.4%, Q3: 6.5%, Q4: 6.8%
CPI Inflation	5.0%	Down by -10 bps (from 5.1%)	Q2: 4.7%, Q3: 5.9% (peak), Q4: 5.5%

3. Rationale & Key Economic Assessment

• Headline vs. Core Inflation: Headline CPI inflation edged past the 4.0% target to 4.4% in June/July 2026, but the MPC noted this was primarily supply-side driven by food and volatile energy costs. Core inflation (ex-food and fuel) remained anchored at 3.9% (and 2.3%–2.5% excluding precious metals), showing no signs of generalized demand-side price pressure.

• Domestic Growth Strength: Supported by robust services activity, strong rural consumption recovery (highlighted by high tractor and two-wheeler sales), resilient private investment, and accelerating merchandise exports.

• Key Risks Monitored:

  1. Geopolitical volatility in West Asia impacting international crude oil supply.

  2. Potential El Niño impact and uneven distribution of the Southwest monsoon on Kharif crop yields.

  3. External trade headwinds, including global supply-chain disruptions and foreign trade policies.

4. Voting Summary

All six members voted unanimously to keep the repo rate at 5.25% and retain the neutral stance:

1. Shri Sanjay Malhotra (Governor)

2. Shri Saugata Bhattacharya (External Member)

3. Dr. Nagesh Kumar (External Member)

4. Prof. Ram Singh (External Member)

5. Dr. Poonam Gupta (External Member)

6. Shri Indranil Bhattacharyya (RBI Executive Director)

The Reserve Bank of India issued its Statement on Developmental and Regulatory Policies alongside the Monetary Policy Committee (MPC) resolution on August 5, 2026.

The policy statement focuses on three main initiatives designed to strengthen co-operative banking governance, update concentration risk frameworks, and streamline loan pricing rules across the financial sector:

1. Resumption of "On-Tap" Licensing for Urban Co-operative Banks (UCBs)

• Context: Following a two-decade pause on issuing fresh urban co-operative banking licenses, the RBI published a Discussion Paper on January 13, 2026, seeking stakeholder feedback.

• Key Policy Decision: Based on public feedback and internal review, the RBI decided to formally resume the licensing of primary UCBs on an "on-tap" basis.

• Next Steps: Detailed draft guidelines setting out entry-point capital requirements, governance criteria, and corporate structure eligibility will be released shortly for public consultation.

2. Review of Concentration Risk Management for Rural Co-operative Banks (RCBs)

• Context: Prudential guidelines governing concentration risks and exposure limits for Rural Co-operative Banks are currently guided by Credit Monitoring Arrangement (CMA) instructions dating back to 2008.

• Key Policy Decision: To reflect the growth and complexity of the co-operative banking sector, the RBI is comprehensively reviewing these instructions to align RCB exposure limits with modern prudential standards.

• Next Steps: Draft amendment directions (titled RBI Rural Co-operative Banks – Credit Facilities Amendment Directions, 2026) have been issued for stakeholder comments through late August 2026.

3. Rationalization of Interest Rate Regulations on Advances Across Regulated Entities

• Context: Market practices around benchmark reset dates, day-count conventions, operational nuances of Marginal Cost of Funds Based Lending Rate (MCLR) and External Benchmark Based Lending Rate (EBLR) currently vary across different categories of Regulated Entities (REs).

• Key Objectives: The RBI proposes a unified, principles-based framework applicable to all REs aimed at:

• Harmonization & Transparency: Standardizing market calculations (such as interest computation rules and benchmark reset intervals) across banks and NBFCs.

• Monetary Policy Transmission: Eliminating operational lags in passing policy rate adjustments to end-borrowers.

• Consumer Protection: Ensuring clear disclosures on floating-rate adjustments and interest rate structures.

RBI Bulletin - June 2026

 Monetary Policy Statement, 2026-27: Resolution of the Monetary Policy Committee (MPC) June 03 to 05, 2026

Monetary Policy Decisions The Monetary Policy Committee (MPC) held its 61st meeting from June 3 to 5, 2026, under the chairmanship of Shri Sanjay Malhotra, Governor, Reserve Bank of India. The MPC members Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Prof. Ram Singh, Dr. Poonam Gupta and Shri Indranil Bhattacharyya attended the meeting.

After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.25 per cent. Consequently, the standing deposit facility (SDF) rate remains at 5.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate remain at 5.50 per cent. The MPC also decided to continue with the neutral stance.

Growth and Inflation Outlook

Global Outlook As the West Asia conflict prolongs without any meaningful resolution in sight, risks to both inflation and growth have increased. Energy markets have been volatile; crude oil reserves are declining and global commodity prices have firmed up. Faced with difficult trade-offs, monetary policy has turned more cautious, and major advanced economy central banks are likely to pivot towards monetary policy tightening. Global financial markets have shown mixed trends, with equities remaining buoyant driven by AI optimism, while sovereign bond yields have hardened on fiscal sustainability concerns and inflation worries. The US dollar index has appreciated recently amid shifting rate expectations and changing risk sentiment.

Domestic Outlook As per several high frequency indicators, domestic economic activity remained largely steady since the outbreak of the conflict. Private consumption has been resilient, while fixed investment maintained its momentum despite cost pressures. Merchandise exports recorded strong growth in April 2026, though elevated freight and insurance costs remain a drag. Services exports continued to be robust. While the economy has withstood the conflict spillovers with limited impact so far, the strains are increasingly becoming visible.

Looking ahead, elevated energy and other commodity prices coupled with continued supply disruptions are likely to affect economic activity. While import diversification in affected commodities has helped in improving supply, it comes at a higher cost. The full impact will depend on the duration of the conflict, time taken for normalisation of supply chains, and the burden-sharing approach among stakeholders. The south-west monsoon is expected to be deficient, with implications for agricultural activity and rural demand; however, programmes for crop diversification and water conservation are expected to mitigate this impact.

Furthermore, sustained momentum in services, the continuing impact of GST rationalisation, and broadly stable employment conditions should support urban consumption. Strong capacity utilisation, sustained credit flows, and the government’s capex are expected to support investment activity. While weak global demand remains a headwind for merchandise exports, services exports are expected to remain steady. Several measures undertaken by the Government to ramp up domestic gas and crude supplies and support MSMEs have strengthened the economy’s resilience.

Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 6.6 per cent, with Q1 at 6.6 per cent; Q2 at 6.3 per cent; Q3 at 6.5 per cent; and Q4 at 6.8 per cent.

Headline CPI inflation inched up to 3.4 per cent in March and 3.5 per cent in April 2026. Fuel inflation remained modest as retail prices were largely unchanged despite spikes in international energy prices. Core inflation remained at 3.7 per cent. Since May, however, retail fuel prices were raised by 7.4 per cent for petrol and 8.4 per cent for diesel, implying a direct impact of about 36 basis points on headline inflation.

Considering these factors, CPI inflation for 2026-27 is projected to be 5.1 per cent, with Q1 at 4.2 per cent; Q2 at 5.1 per cent; Q3 at 5.9 per cent; and Q4 at 5.4 per cent. Core inflation is projected at 4.7 per cent. These forecasts are subject to upside risks from global supply chain disruptions and monsoon uncertainty, though adequate foodgrain stocks provide some comfort.

Rationale for Monetary Policy Decisions The global environment has deteriorated since the last policy meeting. The adverse implications of supply chain disruptions and elevated energy prices are reflected in the moderation of growth and increased inflation projections. CPI inflation remains below the target despite the global shock, and underlying inflation pressures continue to be benign. However, generalisation of inflation through second-round effects on expectations and wages warrants a close vigil.

The MPC was of the opinion that there are considerable risks to the baseline assessment due to uncertainty about the duration of the conflict and the pace of restoration of supply chains. Additionally, the food outlook remains uncertain due to El Niño and sub-normal monsoon forecasts. Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity. Accordingly, the MPC voted to keep the policy rate unchanged and will continue to remain data-dependent and closely monitor developments. The MPC also decided to retain the neutral stance.

The minutes of the MPC’s meeting will be published on June 19, 2026. The next meeting of the MPC is scheduled for August 3 to 5, 2026.

Resilience by Design: Lessons from India’s Banking Sector

Shri Swaminathan J.

Speech by Shri Swaminathan J, Deputy Governor, Reserve Bank of India, on June 1, 2026, at the School of International and Public Affairs (SIPA), Columbia University.

Distinguished faculty members, dear students, ladies and gentlemen. It is a pleasure to be here at Columbia University’s School of International and Public Affairs. SIPA was established in 1946, in the aftermath of the Second World War, to deepen understanding of global affairs and prepare professionals for public service across countries, institutions and disciplines.

We meet at a time when the global policy conversation is again crowded with large themes: geopolitics, climate change, artificial intelligence, technological disruption and the reordering of supply chains. Against that backdrop, banking resilience may seem like a quieter subject. But it has one distinct feature: when it is absent, its importance is immediately recognised. A weak banking system can quickly transmit stress from financial balance sheets to firms, households, public finances and the broader economy. I would like to approach it today through India’s experience.

India’s current position: strength with vigilance India today stands on a relatively strong macroeconomic footing. Even amid geopolitical uncertainty, supply-chain disruptions and volatile commodity conditions, domestic economic activity has shown resilience, supported by strength in industrial and services activity, broad-based demand and improving corporate performance. Inflation is within the tolerance band and external vulnerabilities remain manageable. The Indian financial system enters this uncertain phase with strength: healthier balance sheets, comfortable capital buffers, improved profitability and non-performing assets at multidecade lows.

This position of strength is encouraging. But the best time to build resilience is when conditions are favourable. Central banks are sometimes seen as cautious voices in otherwise optimistic times, expected to ask difficult questions just when the party appears to be going well. Risk has a habit of building quietly in good times and introducing itself loudly when conditions change. Buffers, governance and risk discipline must be strengthened when growth is strong, asset quality appears comfortable, and risk appetite naturally rises. Resilience must therefore be built before it is tested.

India’s recent banking resilience reflects policy learning, supervisory vigilance, stronger prudential frameworks, transparent recognition of stress, credible repair mechanisms and improvements within banks themselves. Banking resilience does not arise automatically from growth or favourable conditions. It has to be designed at multiple levels: in the rules that govern banks, in the supervisory systems that detect vulnerabilities, in the resolution architecture that addresses stress, and in the behaviour of banks themselves. Let me illustrate this through five recent dimensions of resilience by design: transparent recognition of stress, balance sheet strengthening, stronger supervision, calibrated and adaptive regulation, and resilience within banks themselves.

Recognition of stress The first dimension is transparent recognition of stress. Risk often builds when conditions appear favourable. During an upswing, collateral values look adequate, projected cash flows appear reasonable, and optimism becomes embedded in credit appraisal. India’s post-2015 asset quality experience brought this into focus. The stress reflected a combination of factors, including rapid credit growth in certain sectors, challenges with long-gestation projects, delays in stress recognition, and gaps in risk management.

The Asset Quality Review was more than an accounting exercise; it changed the information regime of the banking system. Recognition required banks to provision, owners to recapitalise, borrowers to negotiate, and supervisors to intervene. Transparency changes incentives. While recognition affects reported profitability and market perception, delayed recognition is usually more costly as it weakens credit discipline and increases the eventual burden of resolution.

Balance sheet strengthening Recognition must be followed by a credible chain of action leading to balance sheet strength. Recognition without resolution can leave banks constrained. In India, this phase involved coordinated action across the public policy ecosystem. The Government provided the legal, fiscal, and institutional architecture, including the Insolvency and Bankruptcy Code (IBC). Recapitalisation of public sector banks helped absorb losses and restore lending capacity, while consolidation sought to create institutions with greater scale and capital strength.

The banking system itself also undertook significant balance sheet strengthening. Banks improved provisioning, pursued recoveries and write-offs, raised capital and placed a sharper focus on asset quality. The movement towards more transparent, better-provisioned and diversified balance sheets has been a vital part of the resilience journey.

Stronger supervision and prudential discipline The Reserve Bank’s supervisory approach has evolved from point-in-time entity-level compliance to a more holistic, risk-based and forward-looking assessment. It covers governance, assurance functions, conduct, business models, technology risk, and cyber resilience.

A key element has been deeper engagement with Boards and senior management to identify the root causes of deficiencies, ensuring that issues are addressed at their source. The supervisory toolkit has been strengthened with off-site surveillance, stress testing, vulnerability assessments, and micro-data analytics. Modern supervision is not merely about checking compliance; it is about asking whether risks are understood and priced correctly and whether control functions have sufficient stature.

Calibrated and Adaptive Regulation Modern financial intermediation no longer fits neatly within traditional institutional boundaries. Credit, payments, and underwriting may involve banks, NBFCs, fintech entities, and third-party technology partners, making the system more interconnected. The regulatory response must be both entity-aware and activity-aware.

This approach is reflected in measures such as scale-based regulation for NBFCs and digital lending guidelines. During Covid-19, relief measures were designed to provide timely support while retaining a path back to normal prudential treatment through sunset clauses. RBI’s initiatives endeavour to protect customers without stifling innovation and to support inclusion while ensuring responsible conduct. Resilience by design means regulation by continuous review—rules must be stable but adaptive enough to remain relevant as markets evolve.

Resilience within banks Resilience has to be embedded inside banks. It must be visible in how banks originate assets, price risk, manage liabilities, and govern technology. A significant change in recent years has been the shift in portfolio behaviour away from large, lumpy corporate exposures toward more granular portfolios, including retail and MSME segments with clearer risk assessment.

This bank-level transformation matters because durability depends on internal behaviour. Resilience is built through everyday decisions: what is financed, how exceptions are approved, how early warnings are acted upon, and how accountability is enforced.

The next tests: complexity and uncertainty The next phase of banking resilience will be less about addressing known stress and more about managing complexity and uncertainty. Shocks can arise from varied sources: pandemics, geopolitical tensions, cyber incidents or sudden shifts in market sentiment. Banks must be made adaptable to risks whose timing and form are difficult to predict.

Technology can make banking faster, but it does not automatically make it wiser. AI, cyber risk, third-party dependencies, and climate-related risks will require ongoing attention from both banks and supervisors.

Conclusion Banking resilience is not a fixed achievement; it is a continuing institutional project. It is built through discipline across the balance sheet, transparent recognition of stress, calibrated regulation, and responsible conduct within banks. Strong banks require capital and technology, but they also require judgment, governance, accountability and institutions that learn. Resilience is not only about withstanding the last shock, but about building the capacity to respond well to the next one.

Thank you. Jai Hind.

State of the Economy

Introduction Geopolitical tensions and trade disruptions continue to test the global economy's resilience, with extended supply-side pressures leading to a sustained rise in commodity prices and inflationary expectations until early June. In its latest report, the World Bank downgraded global GDP growth projections while raising its inflation projections due to the West Asia conflict. However, the signing of an interim peace deal between the US and Iran in late June has provided a vital opening for normalisation.

The Indian economy has shown notable strength, with GDP growth in Q4:2025-26 reaching 7.8 per cent, driven primarily by private consumption and fixed investment. High-frequency indicators suggest this momentum has sustained into May 2026, supported by resilient domestic demand and strengthening industrial growth in the manufacturing sector. Headline CPI inflation in May 2026 increased to 3.9 per cent from 3.5 per cent in the previous month, reflecting broad-based increases across food, fuel, and core components. In its June 2026 review, the Monetary Policy Committee (MPC) unanimously decided to keep the policy repo rate unchanged at 5.25 per cent while maintaining a "neutral" stance as it awaits further clarity on global conflicts and monsoon risks.

Global Section The World Bank projects a slowdown in global growth for 2026, with a recovery expected in 2027. While risks remain skewed to the downside, the wider adoption of Artificial Intelligence (AI) and productivity reforms may support medium-term growth. Global Purchasing Managers’ Index (PMI) data showed widespread moderation in May, though the manufacturing sector outperformed services for the third consecutive month.

Commodity prices witnessed some softening in May as Brent crude oil prices declined from April's elevated levels, eventually correcting to below US$ 80 following the West Asia peace deal announcement. Headline inflation generally edged up across major advanced economies (AEs) and emerging market and developing economies (EMDEs) in May. Central banks have adopted cautious stances; while the Euro area and Japan pivoted toward rate hikes, the US and UK held rates unchanged.

Domestic Developments India's annual real GDP growth accelerated to 7.7 per cent for 2025-26, up from 7.1 per cent the previous year.

• Aggregate Demand: Robust private consumption and double-digit expansion in fixed investment supported growth. High-frequency indicators for May show continued resilience, with double-digit growth in E-way bills and electricity demand, the latter driven by a severe heatwave. Urban demand remained strong, reflected in accelerated passenger vehicle sales and domestic air passenger traffic. Conversely, rural demand showed some moderation in retail automobile sales.
• Government Finances: The Central Government’s gross fiscal deficit (GFD) for 2025-26 stood at 4.4 per cent of GDP, lower than both the previous year and revised estimates. State governments, however, experienced some slippages, with a consolidated GFD-to-GSDP ratio of 3.3 per cent.
• Trade and Supply: The merchandise trade deficit widened year-on-year in May 2026 due to higher crude oil prices, even as exports reached their highest level in recent years at US$ 45.2 billion. On the supply side, real gross value added (GVA) grew by 7.9 per cent in 2025-26, with industry and services both growing at 9.0 per cent. Foodgrains production reached a record 376.6 million tonnes, though the south-west monsoon is forecast to be below normal at 90 per cent of the long period average.

Inflation CPI headline inflation inched up to 3.9 per cent in May 2026, driven by broad-based increases. Food inflation saw a sequential pick-up across most sub-classes, and fuel inflation rose due to adjustments in retail prices for petrol, diesel, and CNG. Despite these increases, Indian households continue to pay some of the lowest cooking gas prices globally due to government and OMC absorption of costs. Wholesale Price Index (WPI) inflation rose to 9.7 per cent in May, its highest level in the new base series since April 2024.

Financial Conditions Surplus liquidity in the banking system moderated in May and June due to increased currency in circulation and higher government cash balances. G-sec yields softened following measures by the Reserve Bank and Government to attract foreign capital, including tax exemptions for foreign portfolio investors (FPIs). Bank credit continued to record double-digit growth (17.7 per cent y-o-y as of May 31), outpacing deposit growth.

On the external front, net FDI remained strong in April 2026 at US$ 6.6 billion, significantly higher than the US$ 1.6 billion recorded a year ago. While FPIs initially recorded net outflows, flows turned positive in mid-June following supportive policy measures. India’s foreign exchange reserves remain comfortable at US$ 682.3 billion, providing cover for over 10 months of imports.

Conclusion The global economic outlook remains fragile, and any breakdown in the recent US-Iran peace agreement could reignite risks to inflation, investment, and food security. India enters this period of turbulence with strong fundamentals, including high growth, anchored inflation expectations, and substantial foreign exchange buffers. However, the domestic outlook remains subject to risks from an adverse south-west monsoon.

Reserve Bank of India Bulletin May 2026

 The following is the full text of the keynote address, “Indian Financial Markets – Resilience and Resurgence,” delivered by Shri Sanjay Malhotra, Governor of the Reserve Bank of India, at the 25th FIMMDA-PDAI Annual Conference on May 1, 2026, in Amsterdam:

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Indian Financial Markets – Resilience and Resurgence

Shri Sanjay Malhotra

Distinguished participants, it gives me great pleasure in addressing the 25th FIMMDA-PDAI Annual Conference. The development of India’s fixed income and derivatives markets owes much to such conferences, which provide an opportunity for all stakeholders to get together and deliberate on not only the journey so far but more importantly the way forward. I am confident that this conference will give us many innovative ideas and suggestions for the further development of the markets.

We could not have met at a more appropriate city for this conference to deliberate on the challenges and the opportunities that the markets offer today. It was in Amsterdam where merchants started trading shares and bonds of the Dutch East India Company more than four centuries ago. What emerged in the 17th century was one of the earliest examples of a modern financial marketplace: an organised system where investors could pool capital, transfer risk, and finance ambitious commercial ventures across continents. The innovations that took root – tradable securities, secondary markets, and financial intermediation – in many ways, laid the foundations of modern global finance, as we know it today.

I. Challenges for the global economy & financial system

The conference could not have been at a more opportune time, when the global financial system is navigating through a period of elevated uncertainty and challenges. These have implications not just for the real sector but also for the financial markets.

Geo-economic fragmentation caused by tariffs, trade restrictions, and industrial policies are reshaping not only global supply chains, they are also affecting the free movement of capital and led to fragmentation of financial flows.

High levels of public debt in several major economies is another concern. Their continued fiscal expansion has made it difficult for them to return to the path of fiscal consolidation that was expected post the pandemic related stimulus. On the other hand, geopolitical pressures are compelling a significant rise in defence spending – a shift that could pose major challenges for fiscal sustainability.

Stretched valuations in certain asset classes, particularly equities including a few tech stocks, could also have implications across markets and geographies.

The rapid expansion of private credit markets globally has introduced new areas of opacity and potential systemic risk through increasing interconnectedness with regulated segments.

AI is another source of uncertainty. While AI holds promise to enhance productivity, concerns remain about viability of certain business propositions, the level of efficiency gains, the speed of change and its impact on jobs.

Overlaying these challenges is the recent escalation of geopolitical tensions in West Asia. Energy prices have risen sharply amidst damages to energy infrastructure and disruptions in supply chains. It has already affected economic activity. If the crisis persists longer, it may also translate into second order inflationary pressures.

II. India’s Economic Resilience Amid Global Turbulence

Against this challenging global backdrop, the Indian economy has shown remarkable resilience. In view of this, the theme of this conference, “Indian Financial Markets – Resilience and Resurgence,” is most apt and timely.

Since the pandemic, India has consistently been among the fastest-growing major economies in the world. This performance reflects a combination of strong macroeconomic fundamentals, structural reforms, and prudent macroeconomic management. Growth impulses in the economy have remained robust. Domestic demand continues to be supported by strong consumption and public investment. The government’s emphasis on capital expenditure has helped crowd-in private investment and improve productive capacity. Resultantly, we have recorded an average growth of 8.2 per cent during 2021-25. In 2025-26, the economy is estimated to have grown by 7.6 per cent. Growth in 2026-27 is projected at 6.9 per cent.

Inflation, although vulnerable to periodic supply shocks, has broadly remained within the tolerance band of the monetary policy framework. The flexible inflation targeting (FIT) regime has provided a credible anchor for managing inflation expectations, and reducing average inflation and volatility post its adoption. In the recent period, headline inflation has remained below the inflation target of 4 per cent. We have projected an average CPI inflation of 4.6 per cent for FY 27.

India is firmly on a path of fiscal consolidation. On the revenue side, adoption of GST and other sweeping tax reforms have helped improve tax buoyancy. On the expenditure side, targeted government spending has improved the quality of expenditure, while reducing revenue expenditure as a percentage of GDP.

India’s banking and NBFC sectors have undergone a remarkable transformation in recent years. Their balance sheets have been strengthened significantly, with improvements in capital adequacy, asset quality and profitability. Corporate balance sheets have also improved, supported by stronger earnings. The fund mobilisation by Indian corporates through public markets, especially corporate bond markets, has remained strong over the last two financial years, pointing to a steady broadening of financing channels beyond traditional bank credit.

On the external front:

1. Our foreign exchange reserves remain comfortable, with 11 months of import cover.
2. The current account deficit (CAD) is sustainable; while elevated energy prices will exert upward pressure on the deficit, the recently concluded trade agreements should offset some of the impact.
3. On the capital account, gross FDI has been encouraging. This will remain robust with the recent spree of greenfield FDI announcements especially in the finance and tech sectors.
4. With recent correction in financial asset valuations, we expect repatriations to moderate, improving the net capital account position going forward.

To sum up, India’s strong macro-economic and macro-financial fundamentals remain strong, supported by continued focus on policy certainty, price stability, financial stability, and thrust on reforms, ease of doing business and inclusive growth.

III. Indian Financial Markets – Measures undertaken for development

Moving from the broader economy to financial markets, I must acknowledge that our financial markets have matured considerably over the past few years. This is an outcome of conscious policy choices over the years.

Money Market Starting with money markets, which serve as the primary channel for monetary policy transmission, we have moved towards a more agile liquidity management framework to ensure adequate liquidity in the financial system.

Government Securities Market Government securities markets continue to be deep and liquid, but our efforts are to broaden the investor base, especially by encouraging retail and non-resident participation. The benchmark issuance strategy which has helped build a credible sovereign yield curve and improve price discovery in fixed-income markets, is now being extended to State Development Loans from FY27.

Derivatives Markets The regulatory framework for derivatives markets too has evolved to facilitate ease-of-doing business, wider participation, and innovation. We are facilitating greater product diversity through introduction of total returns swaps on corporate bonds and derivatives on corporate bond indices. These are intended for supporting a well-developed corporate bond market by management of credit risk.

We have also introduced forward contracts on government securities. It has been heartening to see long term investors especially insurance companies utilising this product instead of relying on synthetic financial constructs to manage their long-term interest rate risks.

Efficient Financial Market ecosystem While taking measures for the development of various market segments, we have focussed on strengthening market infrastructure; enhancing transparency and ease of Investments for foreign investors across market segments.

• Strengthening market infrastructure: I would like to highlight three recent initiatives. First, Electronic trading platforms have been introduced for new products such as forex options and Modified MIFOR based derivatives. Second, FX forwards up to 36 months tenor are now being centrally cleared; earlier, forwards up to 13 months tenor only were centrally cleared. Third, the regulations for initial margin for non-centrally cleared derivatives have come into force.
• Enhancing transparency: To enhance transparency, we now have the reporting of OTC Rupee foreign exchange and interest rate derivative contracts undertaken by related parties of market-makers, as well as various cash and OTC gold derivative transactions.
• Ease of Investments for foreign investors: We have eased macroprudential norms for FPI investment in corporate bonds, expanded the Voluntary Retention Route, permitted Special Rupee Vostro Accounts to be invested in debt securities, allowed non-residents to open Rupee accounts in their own regions, and are connecting NDS-OM with global bond trading platforms.

IV. Areas of improvement

While we have made considerable progress, more needs to be done. I am mentioning five areas of improvement:

1. Scope to improve liquidity across all tenors and securities in the central government securities market.
2. OTC derivatives markets remain concentrated in few products; efficient interest rate hedging options need wider availability.
3. Indian banks need to evolve as global market-makers by dealing directly with end-users rather than just offshore makers.
4. Usage of the FX Retail platform remains limited; banks should prioritize this for retail users.
5. Development of credit derivatives is largely an underutilised area.

At the same time, market participants must acknowledge that while a privilege bestows some benefits, it also entails responsibilities. These include ensuring easy access for every user, transacting on fair and transparent terms, meeting regulatory objectives in letter and spirit, and sustaining market integrity.

Conclusion

Let me conclude now. This year marks the 250th anniversary of The Wealth of Nations by Adam Smith. His insight regarding the importance of markets remains profoundly relevant in current tumultuous times.

Our priorities at RBI remain clear: we will continue to deepen financial markets, broaden participation, and further strengthen institutional frameworks. We will strive for efficiency, consumer protection, fairness, transparency, and ethical conduct.

But we cannot do it alone. Strengthening financial resilience is a collective and shared responsibility. Institutions such as trade repositories, FIMMDA, and PDAI must play a vital role in strengthening market conventions and discipline. I am confident that with continued collaboration, Indian financial markets will become deeper, more efficient, and more dynamic in the years ahead.

Thank you.

The following is the full text of the article titled “Monetary Policy in a Time of Heightened Uncertainty – Transcript of the Intervention” by Shri Sanjay Malhotra, Governor of the Reserve Bank of India, as published in the May 2026 RBI Bulletin:

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Monetary Policy in a Time of Heightened Uncertainty – Transcript of the Intervention*

Shri Sanjay Malhotra

Transcript of the intervention by Shri Sanjay Malhotra, Governor, Reserve Bank of India during a panel discussion titled “Monetary Policy in a Time of Heightened Uncertainty” jointly organized by the Swiss National Bank (SNB) and the International Monetary Fund (IMF) on May 12, 2026, as part of the 12th High-Level Conference on the International Monetary System. The panel was moderated by Mr. Adam Posen, President of the Peterson Institute for International Economics. Other panelists included Mr. Joachim Nagel, President of the Deutsche Bundesbank; Mr. John C. Williams, President and CEO of the Federal Reserve Bank of New York; and Mr. Erik Thedeen, Governor of the Central Bank of Sweden.

Good morning, Adam and my fellow panellists.

First of all, let me quote Alan Greenspan, former Chair of the Federal Reserve who said that “uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape”. In other words, uncertainty is the only certainty in monetary policy.

This is so because even in times of low uncertainty and volatility, the economy, monetary policy transmission, and economic models are complex and ever-changing, bringing uncertainty into policymaking. So, central bankers have learnt to live with uncertainty. The monetary policy frameworks have embedded principles which help them navigate uncertainty:

1. First principle is to prioritise robustness over optimality during uncertain times.
2. Second is the Brainard principle of attenuation, which essentially talks about gradualism in policymaking.
3. Anchoring inflation expectations, maintaining transparency, and effective and clear communication are some other principles.

Let me also mention that in India, we are also used to frequent supply shocks. Food items comprise roughly 40 per cent of our CPI basket. Indian agriculture, being significantly dependent on monsoons, is vulnerable to supply shocks.

Supply shocks pose a challenge – pre-emptive and sharp policy tightening, if the shock is temporary, can exacerbate loss of output (growth foregone), while delaying the same can lead to unhinging of inflation expectations, making it difficult to rein in inflation.

In a supply shock, we generally try to “look through” the first-round impact, if we believe that it is transitory and will dissipate quickly. However, if a sustained increase in prices drives up wages, production, and transportation costs (second-round effects) and leads to generalization of inflation pressures, the “look through” approach is no longer optimal, requiring tighter policy.

Since the pandemic, and particularly after the outbreak of the Russia-Ukraine war, central banks have moved towards a more flexible, meeting-by-meeting approach in policy formulation. They are now dependent on a wider array of information variables, using high-frequency data to make faster and more informed decisions. Moreover, while targeting headline inflation, they are increasingly distinguishing between transitory headline spikes and persistent core inflation trends to avoid any pre-emptive policy tightening that is unwarranted.

Central banks have also realised that in the face of structural supply challenges, monetary policy alone cannot handle supply-side bottlenecks. Close coordination with fiscal and structural policies is necessary to address the nature and source of shocks. For instance, in case of adverse supply shocks that have an impact on food inflation, the government has to ease supply constraints through various means – imports, prevention of hoarding, and use of food reserves and buffers – to contain such inflation.

Thus, frameworks focused on price stability are essential anchors. Moreover, conventional economic models often fail during unprecedented supply disruptions, making data-dependent decisions (meeting-by-meeting approach) more important. To be effective, central banks must be flexible enough to handle the immediate impact of shocks without losing sight of the medium-term goal.

Moreover, they need to clearly explain the trade-offs to maintain credibility without adhering rigidly to short-term targets. The future of price-stability-focused frameworks lies in enhancing their agility and credibility rather than in abandoning them.

Given the above backdrop, India’s monetary policy framework, which is a rule-based framework with elements of flexibility embedded in it, has helped in navigating through the persisting shocks and provided us the flexibility to respond depending upon evolving circumstances. I may mention that average inflation, after inflation targeting was introduced, has reduced by about two percentage points.

The sufficiently wide tolerance band of (+)/(-) 200 basis points around the inflation target of 4% provides the necessary policy space to accommodate supply-shock-induced volatility in the short run while maintaining focus on the medium-term objective of price stability. It allows for deviations from the target in the face of temporary shocks without frequent changes in the interest rate. The wide tolerance band had come in handy during earlier supply shocks like the pandemic, when temporary deviations from the target due to supply disruptions – even when it breached the upper tolerance band of inflation – were ignored in order to remain growth supportive.

The sufficiently longer target horizon of three quarters (nine months) also gives us the due flexibility to address transmission challenges in an uncertain environment.

Regarding the current energy shock, we have clearly articulated in our MPC resolution of April 2026 that the economy is confronted with a supply shock and it may be prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. We have been transparent and communicated the conditions which will necessitate the tightening of monetary policy.

That being said, we are aware that the global situation is still fluid, and its macroeconomic implications are still unfolding. We are keeping a close vigil on whether and when the supply shock can become embedded in the general price level that may warrant monetary policy action. We have been maintaining a neutral stance since June 2025, which gives us the flexibility to remain nimble in our approach and respond judiciously to incoming data and information.

Summing up, faced with supply shocks and uncertainty, it is important that policy frameworks focused on price stability are flexible enough to allow central banks to look through transitory shocks while remaining agile and nimble, maintaining a broad policy stance, and avoiding making firm commitments on the future path of policy. In such circumstances, the broad approach is to be even more data-dependent and to continuously reassess the balance of risks. Whether to look through or not depends on the duration of inflation and whether it is generalised in the economy.

Thank you.

The following is the full text of the speech, “Inflation Targeting in India: The Past, The Present and The Future,” delivered by Dr. Poonam Gupta, Deputy Governor of the Reserve Bank of India, at a joint seminar organized by the National Council of Applied Economic Research (NCAER) in New Delhi on May 5, 2026:

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Inflation Targeting in India: The Past, The Present and The Future

Dr. Poonam Gupta

It is a pleasure for me to be here at NCAER to speak on India’s current monetary policy framework. My remarks focus on how the existing framework has evolved over the past decade, where it stands today, and the issues that may shape its next iteration in five years from now.

As you know, the Government of India issued a Gazette notification on March 25, 2026, renewing the existing inflation target of 4 per cent with ±2 per cent tolerance band for five more years, extending the current inflation target (IT) mandate through March 2031. This renewal, wherein all the features of the framework were retained, invites reflection, not merely on continuity, but also on what a decade of experience has taught us and what refinements, if any, may be warranted in the future.

My remarks are organised as follows. I begin with a brief account of the framework’s architecture and a decade of monetary policy decisions and outcomes. I then turn to the public consultation process followed in the latest review, focusing on the four questions that structured it, presenting for each the national and international evidence, and the feedback received. Finally, I will touch on a few issues that may warrant consideration when the framework comes up for its next review in 2031.

1. Framework’s architecture and a decade of monetary policy decisions and outcomes

India’s monetary policy framework has evolved continuously during the past decades, responding to domestic macroeconomic realities as well as advances in global best practices. The impetus for a more fundamental rethink started to emerge around early 2010s in the context of high inflation that exceeded India’s own historical averages and other peer economies, highlighting the need for a strong and explicit nominal anchor for monetary policy. By this time, many countries had successfully implemented inflation targeting and their impacts were broadly assessed to be favourable. India, too, came to regard IT as the appropriate framework to adopt.

Inflation targeting was formally institutionalised with the amendment of the Reserve Bank of India (RBI) Act, 1934 in May 2016. RBI was entrusted with the responsibility of conducting monetary policy in India with the primary objective “to maintain price stability while keeping in mind the objective of growth”.

Section 45ZA of the RBI Act, 1934 mandates that “The Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years”. The government initially notified the inflation target of 4 per cent with a tolerance band of +/- 2 per cent for the period 2016 to 2021. Following the review in March 2021, the target was retained for the subsequent five-year period from 2021 to 2026. In the second statutory review, through the Gazette notification dated March 25, 2026, the framework has been renewed again, for a five-year period through March 2031.

Responsibility of monetary policy decisions is vested with the Monetary Policy Committee (MPC), which was specifically given the task of deciding the policy repo rate required to achieve the inflation target. The decisions of the MPC were to be taken by a majority of votes, with Governor having the casting vote in case of a tie - a provision that, notably, has not needed to be invoked ever during the past decade.

Clear communication and transparency are recognised as defining features of an effective inflation-targeting regime. India’s IT framework reflects this emphasis: the RBI publishes the resolution adopted by the MPC following each meeting; releases the minutes of the individual members of the MPC on the 14th day thereafter; Governor’s statement and press briefings are used effectively as the modes of policy communication; and the RBI publishes Monetary Policy Report (MPR) once every six months.

Indian experience with IT is rather recent as inflation targeting has a history spanning more than three decades at the global level. First adopted by New Zealand in the early 1990s, it has since become the benchmark monetary policy framework across advanced economies (AEs) and emerging market and developing economies (EMDEs). Today, 48 countries operate under an inflation-targeting framework. No inflation targeting country has ever abandoned it after adoption.

International evidence broadly associates inflation targeting with three outcomes: measurably lower and more stable inflation; improved credibility of monetary policy with better-anchored expectations; and reduced fiscal dominance with strengthened coordination between monetary and fiscal policies.

A broadly similar pattern has unfolded in India. The average headline CPI inflation has declined from 8.1 per cent in the pre-IT decade (2006-16) to 4.6 per cent in the IT period (2016-26). More importantly, the inflation variability has reduced significantly. Meanwhile, growth has been sustained and has become more stable. India’s experience does not support the concern that inflation targeting comes at the cost of growth; average annual GDP growth actually edged up marginally from 6.8 per cent pre-IT to 7.0 per cent in the IT decade (excluding COVID-affected years).

2. Five-year reviews of the IT Framework

The first statutory review was conducted in March 2021, where the government retained the existing target. For the second review, the RBI adopted a more consultative approach, publishing a Discussion Paper on August 21, 2025, which sought comments on four central features of the framework:

Question 1: Headline or Core Inflation as the Policy Target? The case for retaining headline CPI rests on the fact that food and fuel (excluded from core) are not merely transient supply-side disturbances in India and can lead to second-round effects. Furthermore, the average citizen understands prices in totality. Over 90 per cent of respondents favoured retaining headline CPI inflation as the target. Internationally, 47 out of 48 IT countries target headline inflation.

Question 2: Is the 4 per cent inflation target still optimal? Responses indicated strong support for retaining the 4 per cent target. This target was originally established as the rate at which macroeconomic conditions are optimized with a zero-output gap. While AEs cluster around a 2 per cent target, EMDEs generally range between 2.5 and 4 per cent; India’s 4 per cent target remains suitable for its stage of development.

Question 3: Should the tolerance band be retained, narrowed, or redesigned? Two-thirds of respondents favoured retaining the existing ±2 per cent band. India’s experience demonstrated its usefulness during the pandemic and the Russia-Ukraine war, where inflation temporarily exceeded 6 per cent without requiring the abandonment of the framework. Cross-country evidence suggests targets with bands are successful in providing flexibility while maintaining credibility.

Question 4: Point target with tolerance band, or pure range targeting? Of 56 respondents, 52 favoured retaining the existing point target with a tolerance band. Pure range targeting can be ambiguous, as the midpoint is often interpreted as the de-facto target anyway, and a transition might be seen as a weakening of commitment. Globally, the trend has been away from range targeting toward point targets with bands.

3. Going forward

The renewal of the framework through March 2031 occurs amid considerable global uncertainty. Preserving the core architecture—the headline CPI inflation target of 4 per cent and the ±2 per cent tolerance band—is a policy choice that strengthens the framework when it is most needed.

A future review in 2031 will depend on the evolution of inflation and growth outcomes. If the economy continues to see robust growth and stable inflation, refinements to the inflation level or band could be considered, but the current global challenges warrant the predictability and flexibility inherent in the existing system.

To conclude, the existing framework has all the inherent features required to nudge the economy toward improved outcomes. Calibrated refinements, backed by structural changes, will ensure its continued relevance in the years ahead.

The following is the full text of the speech, “Prosperous States for a Prosperous India,” delivered by Dr. Poonam Gupta, Deputy Governor of the Reserve Bank of India, at the Columbia Indian Economy Summit 2026 at Columbia University on April 11, 2026:

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Prosperous States for a Prosperous India

Dr. Poonam Gupta

It is my pleasure to be here at the Columbia Indian Economy Summit, 2026. I would like to thank Prof. Arvind Panagariya for his kind invitation to me to speak on issues related to India’s growth trajectory, both at the national and at the states’ level.

My talk is in three parts. I will first present select salient features of the trajectory of economic growth of India over the past four decades, and what it bodes for the years to come. Then, I will present key characteristics of the states’ respective growth trajectories. Finally, I will draw some inferences and implications from these observations for our quest to attain the status of a much more prosperous economy by 2047.

1. Salient features of the trajectory of economic growth of India over the past four decades

India’s economic growth has consistently accelerated since the early 1980s. Average real gross domestic product (GDP) growth has increased from 5.7 per cent in the 1980s to 7.7 per cent in the most recent four-year period.

The acceleration is even more pronounced in per capita income. From about US$ 274 in 1981, per capita income has risen nearly tenfold to around US$ 2700 in 2024. As per the forecasts in the October 2025 World Economic Outlook of the IMF, per capita income is projected to increase to US$ 4346 in 2030. A steady moderation in population growth since around 2014 has further amplified these gains in per capita terms.

India has attained a virtuous cycle of accelerated growth and macroeconomic stability. This stability is reflected in sustainable outcomes across inflation, the current account balance, fiscal position, and financial sector health. Notably:

• Inflation has declined at a faster rate than in most economies.
• The current account deficit has remained within a moderate range of 0.5-2.2 per cent of GDP since 1990.
• The banking sector has undergone a structural turnaround and is now significantly stronger and better capitalized.
• On the fiscal front, India is on a path of consolidation with a distinct shift towards capital expenditure to strengthen growth potential.

These outcomes are attributed to robust policy frameworks, including Flexible Inflation Targeting (FIT), the Goods and Services Tax (GST), and the Fiscal Responsibility and Budget Management (FRBM) framework.

2. Salient features of the trajectory of economic growth across states

India’s growth story consists of broad-based prosperity, with every state recording a significant increase in per capita gross state domestic product (GSDP) over the past two decades. Average per capita incomes across states have surged nearly fivefold in current US dollar terms during this period.

While richer states have generally experienced greater prosperity, the extent of divergence has weakened considerably in recent years. The growth gap between richer and poorer states has narrowed, driven by the better performance of relatively lower-income states such as Odisha, Assam, and Uttar Pradesh.

Beyond income, several welfare indicators are converging even more decisively:

• Consumption Expenditure: States with historically lower consumption levels are now recording faster consumption growth.
• Health and Education: Indicators such as women's literacy, infant survival rates, and nutrition (children not underweight) have trended toward greater parity across states.
• Basic Services: Access to electricity, safe drinking water, and improved sanitation has strengthened considerably nationwide.
• Financial Inclusion: The percentage of women with a bank account jumped from 14 per cent in 2005-06 to approximately 80 per cent in 2019-21.

If past rates of growth are maintained, many states will approach "rich" status by 2047. India’s per capita income is projected to grow by 4 times in US dollar terms by 2046-47, with substantial contributions from below-median states.

3. Inferences and implications for our quest to attain the status of a much more prosperous economy by 2047

Reaching a higher level of prosperity by 2047 will require state-specific growth strategies.

• For above-median states: The focus should be on innovation, scale, planned urbanization, and attracting global talent.
• For below-median states: Priorities include unlocking agricultural productivity, building skills, and integrating into national and international labor markets for labor-intensive activities.

Accelerating growth requires acknowledging the distinct roles of the center and the states. While macro policies like monetary and trade policy are set at the national level, states control critical levers such as the ease of doing business, land and labor conditions, and the delivery of education and health services.

Conclusion

Prosperity is both India’s ambition and its destiny. The central question is no longer whether India will prosper, but how quickly and equitably that prosperity will be shared. Lagging states are catching up, and the distribution of wellbeing is becoming more equal.

Realizing this potential requires moving toward state-specific growth strategies anchored in local strengths and structural realities. This calls for holistic assessments and richer dialogues to fully leverage existing strengths and build new comparative advantages.