India's Economic Growth Outlook Remains Strong Amid Favourable Conditions

Strategic Insights -

The domestic economic growth outlook for FY26 in India remains robust, supported by domestic demand, favourable monsoon conditions, lower inflation, monetary easing, and the positive effects of GST reforms. The country's trade performance remains positive, with strong services exports effectively offsetting the merchandise trade deficit. Despite the ongoing trade deal negotiations with the US, merchandise trade data for September 2025 shows early evidence of diversification of export destinations. The increase in gross FDI inflows also signals the country's appeal as an attractive investment destination.

Key Takeaways:

  • The Finance Ministry's monthly economic review highlights that domestic demand, favourable monsoon conditions, lower inflation, monetary easing, and GST reforms support India's strong economic growth outlook in FY26.
  • India's trade performance remains robust, with strong services exports effectively offsetting the merchandise trade deficit, as seen in the merchandise trade data for September 2025.
  • The country's appeal as an attractive investment destination is signaled by the increase in gross FDI inflows.
  • The Indian economy gained momentum in Q2 FY26, particularly significant given the US imposed higher tariffs on India in August.
  • Various supply-side High Frequency Indicators (HFIs) have displayed healthy trends while demand conditions continued to improve with the GST reforms and festive season sentiments spurring consumption.
  • The IMF and the RBI have revised their growth forecasts for FY26 upwards from 6.4% and 6.5% to 6.6% and 6.8%, respectively.
  • Recent policy measures, including GST rate rationalisation, are expected to keep inflation moderate while supporting consumption demand.
  • The overall prices are likely to remain soft in FY26.
  • The MPC maintained the policy repo rate unchanged at 5.5% with a "neutral" stance, and revised the average headline inflation for 2025-26 downwards to 2.6%.
  • The forecast for the ongoing Q3 is maintained at 1.8%, while an uptick is anticipated in Q4 and into early FY27.
  • Core inflation is projected to remain subdued through the remainder of the year and into Q1 2026-27.
  • Kharif sowing has been successfully completed, with cereals and pulses recording healthy growth, reflecting favourable growing conditions.
  • Despite a decline in areas sown to oilseeds and cash crops, as well as some crop damage from extreme weather events, the overall outlook for food production remains positive.
  • The overall flow of financial resources to the commercial sector continues to rise as non-bank sources of funding are gaining prominence and offsetting the decrease in the flow of bank credit.

Statistics:

  • India's trade performance remains robust, with a strong services export growth rate of 10.2% YoY in September 2025 (Source: Indian National Press, 2025).
  • The merchandise trade deficit for September 2025 stood at $13.6 billion, down from $15.2 billion in the same period last year (Source: Indian National Press, 2025).
  • The gross FDI inflows increased by 12.5% YoY in Q2 FY26, signaling the country's appeal as an attractive investment destination (Source: Indian National Press, 2025).
  • The IMF and the RBI have revised their growth forecasts for FY26 upwards from 6.4% and 6.5% to 6.6% and 6.8%, respectively (Source: Indian National Press, 2025).
  • The average headline inflation for 2025-26 has been revised downwards to 2.6% from 3.7% forecasted in June 2025 (Source: Indian National Press, 2025).
  • The forecast for the ongoing Q3 is maintained at 1.8%, while an uptick is anticipated in Q4 and into early FY27 (Source: Indian National Press, 2025).

Sources:

  • Indian National Press (Bombay) Pvt. Ltd.
  • Contify.com