By laksh5382 
India Ratings and Research (Ind-Ra) expects the Indian economy to grow at 6.6 per cent in FY2026, with investment expected to be a key growth driver like in FY22 and FY24.
The 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 grow from an estimated 6.7 per cent in the current financial year to 7.2 per cent in FY25-26.
IndRa’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 FY20.
However, its revised GDP estimate for 2024-25 is 6.4 per cent, lower than the RBI’s recently lowered estimate of 6.6 per cent for the current fiscal year.
“Ind-Ra believes that the Indian economy is facing monetary, fiscal and external tightening. Although it expects monetary conditions to ease now, fiscal and external tightening is expected to continue in FY 2025-26.
“Nonetheless, FY26 GDP growth is expected to be similar to India’s best decadal growth (FY11-FY20),” Devendra Kumar Pant, chief economist and head of public finance, Ind-Ra, said in the rating agency’s macro outlook for the fiscal year. Said while issuing. 25-26 in the capital.
Pant said if the dollar continues to strengthen, Ind-Ra’s growth and inflation forecasts could be impacted by any tariff war (following US President Trump’s inauguration on January 20) and any capital outflows.
Pant said the Indian economy has experienced a cyclical growth slowdown in the last three quarters, which is expected to reverse from 3QFY25.
“GDP growth in FY20 was impacted by the ill effects of COVID-19, even as the base effect impacted quarterly GDP growth. “While 1QFY25 GDP growth was hit by a combination of a strong base effect and general elections in May 2024, growth in 2QFY25 saw the extended impact of weak private sector capex,” he said.
Monetary easing depends on data
Pant said the Reserve Bank of India (RBI) rate cut in February 2025 will not be sudden and will be a data-based decision.
“Ind-Ra believes the rate cut will be shallow and within 100-125bp in the current easing cycle. The timing of the rate cut will depend on how the upcoming data – the arithmetic of the FY2026 Union Budget, the inflation trajectory and the evolving domestic and global outlook – aligns with the RBI’s flexible inflation targeting approach,” he said.
Chances are high that 3QFY25 CPI inflation will be lower than RBI’s estimate of 5.7 per cent, while 4QFY25 inflation is likely to be higher than RBI’s forecast, he said.
Ind-Ra expects retail inflation to average 4.4 per cent in FY26, while the projected level for 2024-25 is 4.9 per cent. While RBI expects inflation to reach 4 per cent in 2QFY26, Ind-Ra expects it to reach 4 per cent in 3Q-4QFY26 as well.
Ind-Ra has taken into account normal rainfall and stable commodity prices in 2025.
On capital expenditure, Pant said the general elections in 1QFY25 and their impact on investment activities in 2QFY25 are primarily responsible for the weak GFCF growth in FY25. Private sector capital expenditure is still not broad-based and concentrated in a few sectors like roads, airports, renewable energy etc.
Fiscal deficit
Ind-Ra expects the central government to adhere to the fiscal deficit target of 4.5 percent of GDP in FY2026. It estimates the fiscal deficit for the current financial year to be 4.8 percent, while the budget estimate is 4.9 percent.
In the last two Monetary Policy Committee (MPC) meetings, the committee took two steps: changing the monetary policy stance from ‘back to housing’ to ‘neutral’ and reducing the cash reserve ratio (CRR) by 50bp. RBI expects retail inflation to reach 4 per cent level in 2QFY26. RBI has kept the policy rate unchanged from February 2023.