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Synopsis 

ECONOMICS (Radhika Rao)

Macroeconomic indicators point to a stable growth trajectory, relative resilience to global volatility, underpinned by prudent fiscal management, a diversified economic framework, and a reform agenda emboldened by supportive political developments. In the financial markets, we expect domestic investors to widen their footprint, while foreign equity investors turn positive after trimming exposure for much of 2025. This outlook examines fundamental drivers of growth, the evolving policy landscape, and the risks and tailwinds that will shape India’s economic pathway through 2026.

In the year ahead, we expect a further unwind of the hawkish policy set-up since after the pandemic. This is likely to be marked by a few important undercurrents:

#1 Continuation in efforts to strengthen the domestic structural framework in midst of global uncertainties  

#2 Gains from the supply chain shifts and ongoing trade diversion flows

#3 The cyclical growth cycle is expected to stay strong in midst of a handover from being purely investments driven (supply-side) to consumption (demand-side). The surge in 1HFY26 headline growth on account of technical factors is set to fade next year.

#4 Largely contained macro stability parameters.

#5 A competitive rupee will remain a priority.

#1 Continuation in efforts to strengthen the domestic structural framework in midst of global uncertainties

India’s economic ascent over the past three decades marks a journey of successive reforms, technological advancements, benefits of dynamic demographics and political stability. More recently, geopolitical crosswinds have intensified, and strategic alliances have shifted. Supply chain reconfiguration has reordered the lineup of old guards, with the pandemic also leaving longer-term scars in its wake. This backdrop provides a strategic opportunity for India to lay the groundwork for an economic renaissance that would redefine its role in the global order in the coming years.

#2 Gains from the supply chain shifts and ongoing trade diversion flows

In midst of a tariff overhang, we are still constructive on India’s prospects to attract trade diversion flows, as the overall strategic bilateral decoupling between US and China is likely to continue, which will underpin supply chain shifts in the region, including to India. We expect further momentum to a broader move from low-tech industries to medium to high-tech manufacturing and service industries in the country.  

#3 The cyclical growth cycle is expected to stay strong in midst of a handover from being purely investments driven (supply-side) to consumption (demand-side). The surge in 1HFY26 headline growth on account of technical factors is set to fade next year.

Real GDP growth averaged 8% yoy in first half of FY26. The period marked the confluence of cyclical tailwinds, statistical effects (low deflators and base effects) and production boost ahead of indirect tax cuts. Amongst key drivers were higher public investments, service sector outperformance, firmer industrial output and steady consumption, besides statistical effects. Nominal GDP rose by average 8.8% yoy in 1HFY, nearly converging with real GDP growth. Real GDP growth was propped by weak GDP deflators, with the latter averaging 0.8% yoy, near the slowest pace in over six years.

#4 Largely contained macro stability parameters.

Fiscal

At the mid-year mark of FY26, centre’s fiscal revenues are running below budget, raising the possibility of adjustments in spending allocations to meet the deficit target at -4.4% of GDP. For a start, nominal GDP growth is budgeted at 10.1% yoy but the actual growth is likely to be closer to ~8.5% due to weak deflators, putting additional pressure on the fiscal ratios and necessitating stronger revenue buoyancy (vs FY25 1.0x).

Current account

On the current account front, the 2QFY26 current account deficit moderated to $12.3bn (-1.3% of GDP) from $20.8bn (-2.2% of GDP) in 2QFY25. But the gap widened compared to $2.7bn in 1QFY26 (-0.3% of GDP). Undercurrents point to services and transfers helping to offset the deterioration in the goods trade account in the quarter.

#5 A competitive rupee will remain a priority.

The rupee witnessed significant two-way moves in 2025, strengthening in the first quarter of the year, tracking the weak US dollar, followed by a weakening bias in the next three quarters to end the year near a record low against the dollar.

CURRENCY (Philip Wee)

The INR’s underperformance in 2025 was less about India’s domestic fundamentals and more about US politics and trade uncertainties, raising the risk premium on Indian assets. Despite India posting accelerating GDP growth and disinflation, the INR suffered its largest annual depreciation since 2022, sliding to a fresh record low of 90 per USD. The Trump administration’s aggressive tariff stance and ambiguity surrounding a US-India trade deal undermined India’s external outlook at a time when it reported a record-wide trade deficit. Washington used India to signal that even strategic partners will face penalties if they resist US demands at the negotiating table.