India Ratings and Research (Ind-Ra) expects the Indian economy to grow 6.6 per cent in FY26, with investments expected to be a key growth driver, like in FY22 and FY24.
This credit rating agency expects both the government and private sectors to contribute to Gross Fixed Capital Formation (GFCF) growth in FY26. According to Ind-Ra, GFCF is expected to increase to 7.2 per cent in FY’25-26 from an estimated 6.7 per cent in the current fiscal year.
Ind Ra’s latest GDP forecast for 2025-26 is 20 basis points higher than the rating agency’s revised GDP forecast of 6.4 per cent for FY25.
However, its revised GDP forecast of 6.4 per cent for 2024-25 is lower than the RBI’s recently lowered projection of 6.6 per cent for the current fiscal year.
“Ind-Ra believes the Indian economy is facing monetary, fiscal and external tightening. While it expects monetary conditions to ease now, the fiscal and external tightening is expected to continue in FY25-26 as well.
Nonetheless, the FY26 GDP growth is expected to be same as India’s best decadal growth (FY11-FY20),” Devendra Kumar Pant, Chief Economist and Head of Public Finance, Ind-Ra, said, releasing the rating agency’s Macro Outlook for FY’25-26 in the capital.
Ind-Ra’s growth and inflation forecast could however be affected by any tariff war (post-U.S. President Trump’s inauguration on January 20) and any capital outflow, if the dollar continues to strengthen, Pant noted.
Pant said the Indian economy has experienced a cyclical growth slowdown in the past three quarters, which it expects to reverse from 3QFY25.
“The GDP growth till FY24 was impacted by the aftereffects of COVID-19, even the base effect impacted the quarterly GDP growth. While the 1QFY25 GDP growth was impacted by the combination of a strong base effect and the general elections in May 2024, the growth in 2QFY25 witnessed the extended impact of weak private sector capex,” he added.
Monetary Easing Data Dependent
Pant said that the Reserve Bank of India (RBI) ‘s rate cut in February 2025 is not a given and would be a data-driven decision.
“Ind-Ra believes the rate cut will be shallow and within 100-125bp in the current easing cycle. The timing of rate cut would depend on how the forthcoming data – the arithmetic of the FY26 union budget, inflation trajectory and evolving domestic and global landscape – gels with the RBI’s flexible inflation targeting approach,” he said.
The probability is high that the 3QFY25 CPI inflation will be lower than the RBI’s estimate of 5.7 per cent, whereas 4QFY25 inflation is likely to overshoot the RBI’s forecast, he added.
Ind-Ra expects retail inflation in FY26 to average 4.4 per cent, as against the forecast level of 4.9 per cent for 2024-25. While the RBI expects inflation in 2QFY26 to reach 4 per cent, Ind-Ra expects it to touch 4 per cent in 3Q-4QFY26 as well.
Ind-Ra has factored in normal rainfall and stable commodity prices in 2025.
On capex, Pant noted that the general elections in 1QFY25 and their lingering impact on investment activities in 2QFY25 are mainly responsible for the weak GFCF growth in FY25. The private sector capex is still not broad-based and concentrated in a few sectors, such as roads, airports, renewable energy, etc.
Fiscal Deficit
Ind-Ra expects the central government to adhere to its FY26 fiscal deficit target of 4.5 per cent of GDP. For the current fiscal year, it expects the fiscal deficit to be 4.8 per cent, as against the budget estimate of 4.9 per cent.
In the past two Monetary Policy Committee (MPC) meetings, the Committee took two steps: changing the stance of monetary policy to ‘neutral’ from ‘withdrawal of accommodation’ and reducing the cash reserve ratio (CRR) by 50bp. The RBI expects retail inflation to trend towards the 4 per cent mark in 2QFY26. The RBI has kept the policy rate unchanged since February 2023.