Momentum Matters, But India’s Long Path To $5 Trillion Needs Discipline Now
What is required to sustain this growth rate so that India reaches the $5 trillion mark?
The Gist
The RBI's monetary easing and regulatory reforms aim to sustain India's economic growth and attract investment.
- Recent measures include a 50 basis point rate cut and a reduction in the cash reserve ratio.
- The GDP growth projection has been raised to 7.3% for FY26, amid a backdrop of consistent growth.
- Challenges remain, particularly in export performance due to geopolitical tensions and tariff issues.
India’s recent Monetary Policy announced that inflation at a “benign 2.2 per cent and growth at 8.0 per cent in H1: 2025-26,” present a rare “goldilocks period” for the country. A Goldilocks phase in economics indicates a period of low inflation and sustainable growth, making it favourable for investors as well as policymakers.
The combined low inflation and growth trajectory also set the stage for a 25 basis points rate cut by the Reserve Bank of India (RBI), India’s central bank, bringing the repo rate to 5.25%. The rate reduction comes with an assurance to provide liquidity as required, to be delivered through OMO purchases of up to Rs 1 lakh crore and a three-year $5 billion USD-INR buy-sell swap. Together, they will enable efficient transmission of the rate reduction and make money cheaper for the borrowers. With the 50 basis point reduction of June and a one percentage point reduction in the cash reserve ratio (CRR), releasing liquidity of Rs 2.5 lakh crore having fully taken effect, now money should be available to borrowers at significantly lower rates.
While the developed economies are still fighting inflationary pressures and obstacles to growth, India, for the first time ever since it adopted inflation targeting, is witnessing the headline inflation for Q2 of FY26 at 1.7%. This is even below the lower tolerance level of the inflation target. This has created room for the policy scale to weigh in more toward growth.
The momentum in growth is visible. On the back of a growth rate of 8.2% in Q2:25-26, the RBI has upped its GDP projection by 50 basis points to 7.3% for FY26. This comes on top of the consistent annual average GDP growth rate of between 6 and 8% in the last five years since the pandemic. The question now is, what is required to sustain this growth rate so that India reaches the $5 trillion mark?
Cleaning Regulatory Cobwebs
For stronger and sustainable growth, authorities have been focusing on ease of doing business. Apart from building infrastructure and simplifying the tax code, the government of India has announced the much-awaited new labour code. Though the code still will have to be adopted by all the states, labour being a state subject, when fully implemented, it will help create a simplified and efficient framework for businesses for streamlined compliance while safeguarding workers’ rights and welfare.
Financial regulators are moving in the same direction. In its October monetary policy, the RBI had already begun to remove the cobwebs by dismantling the age-old banking regulations that were restrictive and stunted corporate growth. Alongside, the central bank also consolidated a plethora of regulations into a handful of current regulations, bringing in ‘ease of doing business’ for the financial ecosystem. The market regulator, the Securities and Exchange Board of India (SEBI), is also working relentlessly to make capital market investments simpler and safer.
Tariff And Tensions
Despite such an upbeat environment, challenges remain. The current spur in the demand is on account of tax rebate —income tax leaving more disposable income in the hands of the citizens, and GST rationalisation making goods cheaper. Monetary easing, too, has made more money available through easy and cheap credit. Spending in any case is higher during October-November as it is the festival season, and the young and aspirant population is looking to upgrade their standard of living.
The current high demand should push the industry to produce more. But while domestic demand is high, exports have been subdued due to geopolitical tensions and tariff tantrums. The capacity utilisation in manufacturing for the July-September quarter was at 73.2%, down from 77.5% in the January-March quarter.
As pointed out by the monetary policy statement, “merchandise exports declined sharply in October amid subdued external demand accompanied by softer services exports”. External uncertainties continue to put pressure on external demand, which will remain subdued unless the various trade agreements that are currently being negotiated fructify.
The RBI has cleaned up regulations and made money available at a cheaper rate to support the high growth phase. But the very same regime can force lenders to make the infamous ‘adverse choice’, by choosing riskier assets could end up making the lenders’ balance sheets messy once again. Hopefully, the new ECL framework, which will come into effect from April 2026, will act as a deterrent, and the RBI will also be constantly watchful and make mid-way course corrections, if necessary.
Resources are hardly an issue now as money flows in from various directions. The RBI is walking the talk on keeping domestic liquidity adequate; capital markets have helped companies raise Rs. 1.7 lakh crore primarily through IPOs in 2025 so far; foreign investments brought in $81 billion in fiscal 2024-25; and with the authorities on the reform runway, there is scope for more money to flow in; private credit deployment has touched $9 billion in the first half of 2025.
A conducive policy framework, financial access and improved business environment have converged. But the path to becoming a $5 trillion economy or a developed country is long and arduous. It requires creating capacity to absorb the resources which are now available. And that's only for the productive sector. We need that focus and single-mindedness in each sector that contributes to India’s growth. And that cannot happen overnight. It requires vision that combines all the moving parts to make one whole and hard work of walking that long and arduous path without losing focus and momentum that we have now.
