India's private sector activity surged to a record high in August 2025, marking its fastest expansion since December 2005. This robust growth was largely driven by a significant increase in demand, especially within the dominant services sector, which recorded its strongest growth since the survey began. The manufacturing sector also showed considerable strength, with its preliminary Purchasing Managers' Index (PMI) reaching its highest level since January 2008. This economic boom has, however, resulted in the sharpest price hikes in over a decade, with companies passing on increased costs to consumers due to strong demand and higher wage bills.
Amidst these developments, the Reserve Bank of India (RBI) has launched a comprehensive review of its flexible inflation targeting (FIT) framework. The central bank issued a discussion paper on August 21, 2025, inviting public and stakeholder feedback by September 18, 2025. This review is a statutory requirement due by March 2026 and aims to address critical questions, including whether the policy should continue to focus on headline inflation or shift towards core inflation, and the appropriateness of the current 4% Consumer Price Index (CPI) inflation target with a 2-6% tolerance band.
In terms of economic projections, a State Bank of India (SBI) Research report indicates that India's economy likely achieved a robust growth rate of 6.8-7% in the first quarter of fiscal year 2026 (FY26), exceeding the RBI's projection of 6.5%. Despite this strong Q1 performance, SBI anticipates a full fiscal year (FY26) GDP growth of 6.3%, which is slightly below the RBI's 6.5% target. This revised projection is primarily attributed to muted private capital expenditure.
In a significant policy move, the Finance Ministry has directed Public Sector Banks (PSBs) to expand their credit outreach beyond large corporations. This directive encourages PSBs to focus on providing credit to mid-market companies, Small and Medium Enterprises (SMEs), agriculture, and startups. This strategic shift comes in the wake of new US tariffs on Indian exports, which could adversely impact labor-intensive sectors, and aims to counter the PSBs' declining market share in advances compared to private-sector banks.
On the international trade front, India and the Eurasian Economic Union (EAEU), which includes Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia, have signed the Terms of Reference (ToR) to commence negotiations for a Free Trade Agreement (FTA). This initiative is expected to boost exports, support Micro, Small, and Medium Enterprises (MSMEs), and diversify market access, building on a 7% increase in trade turnover between India and the EAEU in 2024.
Indian equity markets continued their positive momentum, with benchmark indices extending their rally for the sixth consecutive trading day on August 21, 2025. The Sensex and Nifty closed with marginal gains, primarily driven by strong performances from heavyweight stocks such as Reliance Industries and ICICI Bank.