“It underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook”, the RBI Governor said.
The duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock, as also the impact of demand impulses, Malhotra said.
“The sudden reescalation of the West Asia conflict in September and the consequent hardening and volatility in global crude prices soured global economic sentiments and heightened financial market volatility. Although global growth remains resilient, it is projected to decelerate in 2026 from the previous year,” Malhotra said in his statement.
“Driven by escalating energy costs and rising food prices, global inflation is projected to increase sharply prompting monetary policy tightening by major central banks, he said.
The RBI Governor noted that the lingering trade uncertainty, rising bond yields in advanced economies and an appreciating dollar are keeping global financial market sentiments nervous and fragile.
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Further tightening of global financial conditions, uncertainty about fair valuation of AI stocks, and an elusive resolution of the West Asia conflict pose significant downside risks to the global economic outlook, he said.
“While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behavior,” Malhotra said.
“While there is limited evidence of demand side pressures, risks in view of strong growth in monetary and credit aggregates exist,” he said.
“Domestic economic activity exhibited resilience amidst global headwinds as evident from real GDP growth of 7.8 per cent in Q1:2026-27. Growth was driven by resilient private consumption and strong investment activity while contribution of net exports also remained positive,” Malhotra said.
High frequency indicators available so far suggest that economic activity is holding momentum in second quarter, albeit with some moderation compared to the preceding quarter, he said.
Despite deficient and uneven southwest monsoon, kharif sowing, although somewhat above its normal level, has been marginally lower than last year. Manufacturing activity, despite cost pressures, is holding well, the RBI Governor said.
Services sector activity remained steady and broad-based, owing to buoyant domestic and external demand, he said.
Both manufacturing PMI and services PMI remained in expansionary zone in Q2:2026-27, although the pace of expansion slowed from Q1, Malhotra said.
Private consumption remained broadly resilient in Q2, with continued support from discretionary spending. Fixed investment remained strong as evident from several related indicators, he said.
Malhotra said some weakness is, however, observed in segments such as non-durable goods and domestic air passenger traffic.
“With focus on expanding market access and diversification, merchandise exports registered higher double-digit growth during July-August 2026. Services exports also recorded an accelerated growth during July-August 2026,” he said.
“Looking ahead, global economic uncertainty and supply chain disruptions are expected to have some bearing on domestic economic activity. Furthermore, weak southwest monsoon along with strong El Niño conditions may impact the upcoming rabi season and rural demand. The likely resilient non-farm activity, however, will continue to support rural consumption,” Malhotra said.
Sustained momentum in services, and broadly stable employment conditions are expected to sustain urban demand. The Government’s continued thrust on infrastructure spending, rebound in private capex and strong credit flows are expected to bolster investment activity, he said.
“While services exports are expected to remain buoyant, the recently operationalised bilateral trade agreements should support merchandise exports. Global headwinds from protracted geopolitical tensions, elevated international commodity prices, additional frictions in global trade and tightening of global financial conditions may weigh on growth outlook,” Malhotra said.
On RBI increasing real GDP growth forecast for 2026-27 to 7.1 per cent from 6.7 per cent, he said the upward revision in growth forecast by 40 bps further underscores the strength of economic activity despite significant headwinds.
“The near-term outlook on inflation points towards continued pressures from supply side, on account of the deficient Southwest monsoon, El Nino conditions and high volatility in international oil prices,” Malhotra said.
“Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil. In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket,” he said.
India’s current account deficit (CAD) remained modest and well below the sustainable levels in Q1:2026-27 despite enduring external shocks, Malhotra said.
“We remain committed to ensuring orderly adjustments to the exchange rate that are in sync with the underlying macroeconomic fundamentals and curbing excessive volatility,” he said.
“The West Asia conflict, tariff related uncertainties, elevated bond yields and risks of an unwieldy correction in valuation of AI stocks are keeping global economic sentiments edgy with risk-off sentiments on Emerging Market Economies. While these factors are weighing on the domestic growth-inflation outlook adversely, the inherent resilience and strength of the Indian economy are helping navigate through these challenging times,” Malhotra said.
We shall implement policies that further add to this resilience. Accordingly, we shall strive for price and financial stability as both are essential for sustainable growth in the long run, he assured.
Malhotra also announced measures including allowing inter-operability among NBFC Account aggregators, enabling aggregation of financial information through all account aggregators from one account aggregator.
“We are also facilitating SEBI regulated depositories to include information related to deposit accounts in their consolidated account statement (CAS). The measures will be implemented by 31 December, 2026,” he said.
RBI shall constitute a Technical Consultative Committee for Financial Markets, in response to the rapidly evolving financial market dynamics, Malhotra said.
The Committee will serve as a forum for structured engagement with market participants and other stakeholders on policy and operational matters related to financial markets, he said.