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The Indian economy is riding on renewed momentum and resilience. This economic outlook is backed by strong agriculture, construction, manufacturing PMI, and services. However, due to the recent GST rate cuts and their channel effects, a short-term slowdown is expected before the end of the year.
Growth resilience, GST cuts, inflation path
In the first quarter of FY26, India’s GDP slightly exceeded the RBI’s forecast of 6.5%. However, it is expected that the GST cuts will slow down this upward inflation trajectory in Q2.
While these cuts may provide short-term relief, inflation will rise again because of higher food prices, short-term relief measures, low fiscal risks, and increased consumer spending.
India’s sovereign rating was upgraded to BBB earlier than expected, but this may not impact inflows to a great extent. It will be critical to keep an eye on inflation and external financing pressures in the coming months.
External pressures & policy risk
While domestic growth looks steady, India faces risks from external factors. A wider Current Account Deficit (CAD) is possible as consumption rises and limited global savings are making financing this deficit harder.
On the policy side, fiscal stability in FY26 looks positive due to non-tax revenue inflows. However, there are long-term risks due to lower GST revenues and high spending, particularly on defence. Moreover, monetary policy easing is unlikely due to higher inflation and weak global capital flows.
Global currency outlook
- Chinese Yuan (CNY): The Chinese government expects the yuan to appreciate, as policymakers prioritise stability and project global credibility.
- United States Dollar (USD): The US dollar is projected to weaken over time. This is due to high fiscal spending and aggressive rate cuts, which are driving long-term inflation.
- British Pound Sterling (GBP): The British pound is weakening due to the UK’s weak economy, fiscal tightening and low productivity weighing on long-term growth.
- Japanese Yen (JPY): The value of the Yen has remained weaker than Japan’s pre-election levels. The Bank of Japan's (BOJ) possible rate hike has curbed yen losses.
Key takeaway
The Indian economy looks steady at this moment, but is largely dependent on domestic consumption and government spending rather than external support. Inflation is expected to rise again, and the RBI may not cut rates further.
For investors, this means expecting stable growth in India. However, investors must be cautious about the potential impact of a weaker rupee, the current state of the bond market, and global market volatility.
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