New Delhi | India’s economy expanded at its fastest pace in six quarters during Q2 of FY26, supported by resilient domestic demand and stable financial conditions, even as global uncertainty moderated from elevated levels, the Reserve Bank of India said in its December 2025 Bulletin released on Monday.
According to the RBI’s State of the Economy assessment, high-frequency indicators for November suggest that overall economic activity remained firm, with demand conditions holding up across key sectors. While headline consumer price inflation edged up sequentially, it stayed below the lower tolerance threshold, offering comfort on the price-stability front.
The central bank noted that financial conditions remained benign, with credit flows to the commercial sector continuing to be strong, reflecting sustained appetite for investment and consumption financing. These trends, the RBI said, point to an economy that has regained momentum after a period of moderation earlier in the fiscal year.
External balances improve, current account deficit narrows
On the external front, the RBI observed a narrowing of the current account deficit (CAD) in Q2 FY26 compared with the same period a year earlier. This improvement was driven by a lower merchandise trade deficit, alongside robust services exports and strong remittance inflows.
Globally, the Bulletin noted that equity markets witnessed intermittent bouts of volatility amid concerns over stretched valuations, but overall uncertainty indicators continued to retreat. This easing of global stress, combined with steady domestic fundamentals, helped support India’s macroeconomic stability during the quarter under review.
Fiscal position: Receipts on track, capex remains strong
A separate article in the Bulletin, titled “Government Finances 2025–26: A Half-Yearly Review,” examined the fiscal position of the Centre and States in the first half of the current financial year. It found that the Centre’s receipts were broadly in line with Budget estimates, with moderation in tax revenues partly offset by strong non-tax revenues and non-debt capital receipts.
Revenue expenditure was described as contained, while capital expenditure growth remained consistently robust, underlining the government’s continued focus on asset creation. At the State level, revenue receipts grew from both tax and non-tax sources, although grants from the Centre declined during the period.
Despite this, States maintained the pace of revenue spending and recorded an improvement in capital expenditure. Both the Centre and the States also saw a rise in the quality of expenditure, reflected in a declining ratio of revenue expenditure to capital outlay.
New leading indicator to track manufacturing cycle
The Bulletin also introduced a Composite Leading Indicator (CLI) for manufacturing gross value added (GVA), designed to anticipate turning points in the manufacturing business cycle. The indicator has been developed using a growth-rate-cycle methodology and advanced machine learning techniques, including Random Forest and XGBoost models.
According to the RBI, the proposed CLI leads the manufacturing GVA growth cycle by one quarter and has demonstrated robustness both in the pre-pandemic period and during the post-COVID recovery phase. The indicator draws on a wide range of variables, including domestic demand, inflation trends, credit flows, sentiment surveys, and global developments.
Safe-haven assets under geopolitical stress
Another analytical study in the Bulletin, “Decoding Safe Asset Volatility Amid Geopolitical Risks Using Neural Networks,” examined how traditional safe-haven assets respond to rising geopolitical tensions. The study found crude oil to be the most sensitive to geopolitical shocks, while gold continued to exhibit strong price stability.
Silver and US Treasuries showed moderate responses to heightened geopolitical risks. The RBI noted that neural network–based models, incorporating country-specific geopolitical risk indices, outperformed conventional econometric models in forecasting asset volatility.
Views not binding on policy
The central bank clarified that the views expressed in the Bulletin’s analytical articles are those of the authors and do not represent the RBI’s official policy stance.
Overall, the December Bulletin paints a picture of an Indian economy gaining traction, with growth accelerating, inflation remaining within comfort levels, fiscal metrics improving, and external balances strengthening—providing policymakers with a relatively stable macroeconomic backdrop as the second half of FY26 unfolds.
