In a significant vote of confidence for the Indian economy, Fitch Ratings has upgraded India’s GDP growth forecast for FY26 to 6.9%, up from its previous estimate of 6.5%. The revision follows stronger-than-expected momentum in the services sector, resilient domestic consumption, and robust industrial output. However, the agency also flagged rising trade tensions with the United States as a potential risk to sustained growth.
Strong Start to FY26: Services and Manufacturing Drive Expansion
India’s economy expanded by 7.8% in the first quarter of FY26 (April–June), marking its fastest pace in five quarters. This acceleration was fueled by a surge in services activity and a sharp rise in manufacturing output. The August services PMI climbed to 62.9—its highest since June 2010—while the manufacturing PMI hit 59.3, a 17-year high. These indicators reflect strong supply-demand alignment and improving business sentiment across sectors.
Fitch noted that the wedge between nominal and real GDP growth narrowed significantly, with GDP deflator growth at its lowest since Q3 FY19. This suggests that inflationary distortions are minimal, allowing real growth figures to more accurately reflect economic activity.
Domestic Demand Remains the Key Driver
Fitch emphasized that domestic demand will continue to be the primary engine of growth. Strong real income dynamics, supported by subdued inflation and looser financial conditions, are expected to sustain consumer spending and investment. The Reserve Bank of India (RBI) projects FY26 growth at 6.5%, citing government-led capital expenditure and a nascent recovery in rural demand.
Retail inflation fell to 1.55% in July, its lowest level in eight years, driven by a 1.76% decline in food prices. Above-average monsoon rainfall and large stockpiles have helped keep food inflation in check. Fitch expects overall inflation to remain subdued, forecasting a year-end rate of 3.2%.
Trade Tensions with the US: A Cloud on the Horizon
Despite the upbeat domestic outlook, Fitch warned that escalating trade tensions with the United States could dampen investor sentiment and disrupt capital flows. The US has imposed a 50% tariff on Indian imports, including a 25% penalty linked to purchases of Russian crude oil. While Fitch expects these levies to be negotiated down over time, the uncertainty surrounding trade relations poses a risk to business confidence and investment planning.
New Delhi has criticized the tariffs as punitive, raising concerns about supply chain disruptions and the broader impact on India’s export competitiveness. The Asian Development Bank has already trimmed its FY26 forecast to 6.5%, citing these trade frictions and policy uncertainty.
Growth Outlook Beyond FY26
While FY26 is expected to be strong, Fitch projects a gradual moderation in growth thereafter. The agency forecasts GDP growth of 6.3% in FY27 and 6.2% in FY28, as the economy operates slightly above its potential and global headwinds begin to weigh more heavily.
The RBI is expected to cut interest rates by 25 basis points later this year and maintain them through 2026, before beginning a tightening cycle in 2027. This policy stance is aimed at supporting growth while keeping inflation within the target range.
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