India’s economy has faced a lot of headwinds over the past year, particularly on the external front, with the US administration imposing a steep 50 per cent tariff on Indian imports. Domestic demand, particularly in urban markets, was also sluggish in the first half of 2025. The rupee too remained under pressure, hitting a new low of Rs 91 to the US dollar, weighed down by relentless selling by foreign institutional investors.
Despite the headwinds, India’s GDP growth accelerated 8.2 per cent in the July-September quarter—a six-quarter high. This growth was on top of the 7.8 per cent growth clocked in the April-June quarter. The strong growth in the first two quarters prompted many, including the Reserve Bank of India, to revise their growth forecast for the full year.
The Goods and Services Tax (GST) reductions announced in September, coupled with the 125 basis points of monetary policy easing by the RBI, are expected to give a fillip to consumption and further support the economic momentum, say economists. Inflation is expected to remain low for some time, and that should further aid in consumption growth.
However, external pressures are likely to remain at least in the near-term, and the hope would be that a trade deal with the US will materialise in 2026.
“With fiscal and monetary headwinds receding, GDP growth has picked up in the financial year 2026. In financial year 2027, the pace of fiscal consolidation should slow further, and the lagged effects of monetary easing should become visible, pushing growth to 7.5 per cent,” said Neelkanth Mishra, chief economist of Axis Bank.
India’s trend growth at 7 per cent represents the economy’s long-term potential, determined by structural factors such as labour force expansion, capital accumulation and productivity, Mishra noted, adding that actual growth could exceed this trend through fiscal or monetary measures and could stay elevated without inflationary pressures.
Credit ratings agency CareEdge is also expecting India’s GDP to grow 7.5 per cent this year and 7 per cent in the next financial year.
“The growth momentum will be supported by factors like comfortable inflation, lower interest rates and lower tax burden. Likely US-India trade deal would provide further impetus,” said Rajani Sinha, chief economist at CareEdge.
According to Sinha, healthy agricultural activity, reduced income tax burden, GST rationalisation, interest rate cuts and front-loading of exports had supported India’s economic growth in the first half of this financial year. In the second half (October-March), growth is seen around 7 per cent, with the impact of the front-loading of exports fading and consumer demand also normalising after the festive season.
CPI (consumer price index) inflation is expected to remain low in the current financial year, averaging around 2.1 per cent for the year. Next financial year, it could average around 4 per cent on the low base of this year, Sinha said. Mishra of Axis Bank also sees inflation averaging 4 per cent next year.
The RBI, in the latest monetary policy committee meeting this month, reduced the benchmark repo rate by 25 basis points. Cumulatively through 2025, the MPC reduced the key rate at which the central bank lends money to commercial banks by 125 bps to 5.25 per cent from 6.50 per cent. The central bank also raised its GDP growth forecasts for the year ending March 2026 to 7.3 per cent from 6.8 per cent that it had projected in October.
It also slashed its CPI inflation forecast for the current financial year to 2 per cent from 2.6 per cent. It is expected to rise to 4 per cent by the second quarter of the next financial year, according to the RBI’s projections.
Mishra sees limited room ahead for rate cuts with the headline inflation expected to rise next year. Sinha of CareEdge says there is scope for another 25 bps rate cut based on the inflation projection, but expects the MPC to keep interest rates on hold and preserve the policy space.
A key monitorable in 2026 will be the ongoing trade talks between India and the US and the potential signing of a bilateral trade deal.
India is also considering a trade deal with Mexico after the Latin American country raised tariffs on imports from countries that don’t have a free-trade agreement with it. This includes countries like India and China. Mexico is a big market for exports of automobiles and automotive components from India, and these exports could take a knock due to the higher tariffs.
Any adverse unexpected developments on the global front, like the tariffs imposed by Mexico, would be a dampener to growth prospects next year, according to Sinha.
Another key thing to watch out for will be the rupee movement against major currencies. The rupee has sharply depreciated against the US dollar this year to around 91, amid global uncertainties and huge FII outflows from India’s equity market. Sinha feels the rupee could weaken further in the near-term amid worsening sentiments; over a longer term, a course correction is expected, and she expects it to trade in the 89-90 range.
“This is mainly based on the expectation that macro fundamentals are good, even on the external front, we are expecting current account deficit at 1 per cent of GDP in 2026-27 and we are expecting capital flows in terms of gross FDI inflows and FII inflows to improve,” Sinha said.
Bloomberg is expected to include Indian government bonds in its Global Aggregate Index from April 2026, and that alone could lead to around $20-25 billion in inflows into India.
Axis Bank’s Mishra is expecting the rupee at around 90 by June 2026 and 92 by June 2027, with the pace of depreciation dependent on the evolution of capital flows and global risk appetite.
“Looking ahead, the base case is for mild, not wild depreciation of the rupee against the dollar,” he said.