India’s economy is projected to expand by 6.5% in the financial year 2025-26 (FY26), a slight increase from the estimated 6.4% growth in FY25, according to a report by Crisil.
The report attributes this expected growth to lower inflation and potential rate cuts by the Reserve Bank of India (RBI), provided global conditions remain stable and the country experiences a normal monsoon. It states, "Lower inflation and the RBI's rate cuts are expected to lift growth next fiscal, assuming a normal monsoon and lower crude oil prices."
The report underscores that while government spending will continue to support economic activity, the impact of fiscal stimulus will gradually diminish due to ongoing fiscal consolidation.
A crucial factor for sustained growth will be private sector investments, which need to gain momentum. However, external challenges, including tariff hikes by the United States, could pose risks to India's export performance.
Inflation is projected to moderate further, with Consumer Price Index (CPI) inflation expected to decline from 4.7% in FY25 to 4.4% in FY26. This reduction will be driven by an anticipated normal monsoon, a high base effect in food inflation, and softer global commodity prices.
However, non-food inflation may witness a marginal uptick due to an adverse base effect. If inflation approaches the RBI’s target of 4%, it could pave the way for additional rate cuts, further stimulating economic growth.
Crisil also forecasts a gradual reduction in India’s fiscal deficit, which stood at 5.6% of GDP in FY24. It is expected to decline to 4.8% in FY25 and further to 4.4% in FY26, supported by disciplined revenue expenditure and a continued emphasis on capital investment.
On the external front, the current account deficit (CAD) is likely to widen from 1.0% of GDP in FY25 to 1.3% in FY26, primarily due to trade headwinds from U.S. policies affecting exports. However, a strong services trade balance, steady remittance inflows, and lower crude oil prices will help contain any sharp increase in the deficit.
The Indian rupee is projected to depreciate gradually, averaging ₹86 per dollar in FY25 and ₹87 per dollar in FY26. While the CAD remains within manageable levels, global geopolitical uncertainties may contribute to fluctuations in currency markets.
Crisil’s outlook indicates that India’s economy is on track for steady growth, supported by easing inflation and potential monetary policy adjustments by the RBI. However, challenges such as subdued exports and the need for stronger private investment could impact the overall growth trajectory.