Goldilocks phase of low inflation, stable growth set to continue in FY27: India Ratings

India’s real growth rate has surprised on the upside in the first two quarters of 2025-26, coming in well above expectations of economists as well as the RBI. At the same time, inflation based on the Consumer Price Index (CPI) has been rather subdued, with the central bank having to cut its forecast six times in 2025 to 2 per cent for the fiscal year ending March. As a result, Governor Sanjay Malhotra said in early December that benign inflation and 8 per cent growth in the first half of the year presented “a rare goldilocks period”.

Risks, though, remain, with the main challenges being a weak currency – India Ratings sees the rupee averaging 92.3 per US dollar in 2026-27 – a high base effect, slower growth in indirect tax collections due to the cuts made to the Goods and Services Tax (GST) rates, a possible El Nino in mid-2026, and weaker-than-expected demand revival. “Emerging tech like AI (artificial intelligence) also presents new hurdles,” Devendra Kumar Pant, India Ratings’ Chief Economist and Head of Public Finance, said on Tuesday.

On the flip side, growth could also exceed current projections, especially if India manages to quickly finalise a trade deal with the US. “Upcoming changes to the base year for GDP and CPI to 2022-23 and 2024, respectively, will prompt a revision of the current economic outlook once new data is available,” the agency said in a statement.

The Ministry of Statistics and Programme Implementation (MoSPI) is in the midst of updating key macroeconomic data, with the first advance estimate of GDP that will be released on Wednesday being the last growth number as per the current methodology and the 2011-12 base year. At the end of February, MoSPI will release GDP data for October-December 2025 as per the new base year and after having incorporated certain changes in how the data is compiled. CPI inflation data for January, which will be released on February 12, will also be as per the new consumption basket based on the 2023-24 Household Consumption Expenditure Survey and with 2024 as the base year for prices.

Consumption, investment trends

According to Pant and Paras Jasrai, Associate Director and Economist at India Ratings, both private consumption and investment will benefit next year from the government’s reform momentum, with positive rural real wage growth supporting consumption demand.

“With five consecutive quarters of agricultural GVA (gross value added) growth surpassing 3.5 per cent and declining inflation in 2025-26, consumption demand is set for a sustained boost,” India Ratings said, projecting a 7.6 per cent increase in private consumption in 2026-27 on the back of strong service sector growth, low inflation turning real wages positive, the personal income tax cuts announced in the Union Budget for 2025-26, and the GST rate cuts.

In the first half of 2025-26, private consumption rose 7.5 per cent year-on-year in real terms.

On the investment side, gross fixed capital formation is expected to grow by 7.8 per cent next fiscal, led by the government’s capital expenditure. “Though some sectors like telecom and chemicals may see slower capex, others like power, logistics, and real estate continue robust growth. Global tech giants are turning India into an investment hotspot, especially in electronics and mobile manufacturing, though further policy enhancements are needed to solidify India’s role in the global supply chain,” the economists noted.

Gross fixed capital formation, a proxy for investments, rose 7.6 per cent in April-September 2025. And while the Central government’s capital expenditure was up 28 per cent in the first eight months of 2025-26 as per latest data, the jury is still out on private capex, with India Ratings noting on Tuesday that low interest rates were a necessary, but not sufficient, condition for investment demand. However, with loan growth to the industry picking up pace in the second half of 2025, there is optimism on the private capex front, Jasrai said.

The RBI cut the policy repo rate by 125 basis points in 2025.

On the fiscal deficit front, India Ratings expects the Central government to meet its target of 4.4 per cent of GDP for the current fiscal and set an aim of 4.1 per cent for 2026-27.