India’s FY26 Report Card : GDP Performance, RBI Monetary Policy, GST Rationalisation, Inflation Trends, FIIs Outflow and More

Introduction

FY2025-26 started with India focusing on most factors. Growth was accelerating, inflation was at historic lows, the RBI cutting rates, tax collections were strong, and the government was maintaining its capital expenditure push without losing fiscal discipline. For much of the year, the Indian economy looked like the clearest proof that a large emerging economy could grow fast without over exhaustion.

Then came the last quarter. A conflict erupted in West Asia in late February 2026. Crude oil prices crossed $110 per barrel. The rupee, already under pressure, fell over 11% in the financial year 2026, hitting an all-time low. Foreign investors pulled money out of Indian equities. The RBI paused rate cuts and shifted to managing currency and liquidity pressures instead. Markets turned volatile. Inflation projections for FY27 were revised sharply upward.

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Despite the disruption in the final months, several things stood out across the full year. GDP grew at 7.6%, the fastest pace in recent years. Inflation stayed well below the RBI's 4% target for most of the year. GST collections crossed record levels. Direct taxes grew steadily. India received credit rating upgrades from global agencies. DII investors absorbed the foreign outflows and kept markets from a sharper fall. And the government completed its capital expenditure programme largely on track.

FY26 was a year that showed both India's strength and its vulnerabilities.

GDP Growth for FY26

FY2025-26 turned out to be a landmark year for India's economy, both in terms of the growth numbers and the way those numbers were measured. India revised its GDP base year from 2011-12 to 2022-23, the most significant overhaul of its national accounts framework in over a decade.

Under the new series, real GDP growth for FY2025-26 is estimated at 7.6%, higher than the 7.1% recorded in FY2024-25. Nominal GDP, measured at current prices, grew by 8.6%. In absolute terms, Real GDP at constant prices reached ₹201.90 lakh crore, while Nominal GDP at current prices stood at ₹357.14 lakh crore.

Under the older series with base year 2011-12, the First Advance Estimates had pegged real GDP growth at 7.4%, up from 6.5% in FY2024-25. The Economic Survey FY2025-26, tabled in Parliament, also cited 7.4% growth, confirming India as the fastest-growing major economy for the fourth consecutive year.

Quarterly Trajectory

Q1 FY26 (April to June 2025) delivered real GDP growth of 7.8%, driven by private consumption and capital formation. Q2 FY26 (July to September 2025) accelerated to 8.2%, the highest quarterly print in six quarters. Manufacturing grew at 9.1% and financial, real estate, and professional services expanded at 10.2% in that quarter. Together, H1 FY26 delivered 8% growth compared to 6.1% in H1 FY25.

Q3 FY26 (October to December 2025) maintained 7.8% growth under the new base year series, up from 7.4% in Q3 FY25 and 7.1% in Q3 FY24. Q4 FY26 was projected at 6.2% to 6.5%, reflecting the onset of headwinds from the West Asia conflict and elevated crude oil prices.

Sectoral Performance for FY26

The Services segment led the economic growth story. Services grew by 9.1% in FY26 against 7.2% in FY25. Services' share in the GVA increased to the historical peak level of 56.4% based on the First Advance Estimates. Financial services, real estate services, and professional services grew by 9.9%, while trade, hotel, transport, and communication services grew between 7.5% and 10.1%.

Double-digit growth was seen in the manufacturing sector during FY26 similar to the past two financial years FY23-24. The construction sector grew by 7.2% in Q2. Agriculture grew by 3.1% due to above-normal monsoon, record production of both rabi and kharif crops which made food prices low and rural incomes steady throughout the year.

The Base Year Revision

The switch to base year 2022-23 included data collected from the Annual Survey of Unincorporated Sector Enterprises, Periodic Labour Force Survey, GST Network data, e-Vahan vehicle registration database, and Public Financial Management System data. This revision helped cover a wide range of sectors, especially India's informal sector, gig workers, and digital sector, thus eliminating the proxy data usage from 2011.

Global Standing

India continued to be the fastest-growing economy among other major economies during FY26. According to the IMF projections, India is expected to grow faster than any other economy in FY26 with the rate higher than 6%. In FY27, RBI forecasted the economic growth at 6.9% impacted by elevated oil prices, depreciation of the currency, and geopolitical issues in West Asia.

Section 2: Inflation and Monetary Policy

FY2025-26 was arguably the best year India had seen for inflation in recent years, at least for the first three quarters. The full-year average CPI inflation came in at approximately 2.1% under the old series, the lowest since the series began. The year began with a disinflationary trend that lasted nine consecutive months, with inflation reaching a multi-year low of 1.6% in July 2025.

The primary driver of low inflation was food prices. A strong monsoon, adequate buffer stocks, record wheat and pulse output, and the broader disinflationary global backdrop all kept food inflation in negative territory for much of the year. The Economic Survey noted that food prices declined 10.5% over a nine-month stretch, the longest such decline in the CPI series history.

Adding to this, the GST Council rationalised rates effective September 22, 2025, which directly impacted around 11.4% of the CPI basket, further pulling down retail prices. Core inflation remained subdued and contained throughout the year.

India also introduced a new CPI series in February 2026, with the base year revised to 2024. The first reading under the new series showed inflation at 2.75% in January 2026, reflecting updated weights from the Household Consumption Expenditure Survey. February 2026 saw CPI at 3.21%, the first reading after the West Asia conflict began to filter into energy prices.

The RBI also reaffirmed its inflation targeting framework in March 2026, setting a 4% retail inflation target with a tolerance band of 2% to 6% for the five years from April 2026 to March 2031.

Monetary Policy - A Full Rate Cycle in One Year

The RBI completed what turned out to be its full rate-cutting cycle within FY2025-26. The cumulative reduction across the year was 125 basis points.

In April 2025, the first cut of 25 basis points made the repo rate decrease from 6.25% to 6%. A more substantial 50 basis point cut brought the rate down to 5.50% in June 2025. The October 2025 meeting decided not to change interest rates in order to assess the effect of previous interest rate changes. Finally, the December 2025 cut to 5.25% was referred to as the final interest rate reduction in the ongoing easing cycle. Both the February and April 2026 interest rate decisions saw no change in the interest rate, which had been reduced to 5.25%. In particular, the situation had undergone considerable changes due to the West Asia crisis.

Alongside the rate cuts, the RBI injected substantial durable liquidity into the banking system. Cash reserve ratio cuts amounted to ₹2.5 lakh crore. Open market operations totalled ₹6.95 lakh crore. Forex swaps of around $25 billion were conducted. These measures helped transmit the rate cuts into actual lending rates. The weighted average lending rate on fresh rupee loans declined by 59 basis points over the year.

The April 8, 2026 MPC decision to hold the interest rate at 5.25% was accompanied by changes in the policy statement. According to the RBI forecast, CPI inflation would be 4.6% for FY27 with the peak of 5.2% in Q3 FY27 due to the pass-through effects of crude oil price increases. The forecasted economic growth rate was set at 6.9%. According to Sanjay Malhotra, the governor of RBI, forex reserves stood at $682 billion.

Section 3: Financial Markets - Nifty, Sensex, FII, DII and India VIX

India's equity markets had a year of two very different halves. The first half of FY26 was broadly positive, with strong earnings, strong domestic flows, and an improving macroeconomic backdrop pushing the Nifty 50 to its 52-week high of 26,373 and the Sensex touching highs above 85,000. The second half saw markets come under increasing pressure from global headwinds, FPI outflows, and eventually the West Asia shock in late February 2026.

FII Outflows and DII Support

Foreign Portfolio Investors were net sellers for a significant portion of FY26. Total FPI outflows in equity markets through much of FY 26 exceeded ₹332686.94 crore, with foreign investors being net sellers on every single trading day in March 2026 alone as the West Asia conflict escalated. Since the beginning of calendar year 2026, foreign institutional and portfolio investors sold Indian equities worth approximately ₹1.71 lakh crore

The reasons were multiple. US tariff concerns earlier in the year, a strengthening dollar, rising crude oil prices, FPI exit because of  rupee depreciation, and risk-off sentiment globally all drove the outflow.

DIIs served as the primary means for balancing foreign investors' sell-off. From April 2025 to March 2026, domestic institutional investors purchased around ₹8.50 Lakh Crore worth of stocks in the cash equity market. Mutual funds, insurance companies, and pension funds together absorbed the foreign investment selling and helped avoid a steeper decline in overall market performance. Regular investments in SIP stayed steady during the year, providing constant inflow of domestic capital.

India VIX

The fear index of Indian equity markets – India VIX, also underwent considerable fluctuations during FY26. In July to December 2025, during periods of calmness on the market, India VIX dropped to multi-month lows of 9 to 10, showing very low market anxiety. However, towards the end of the fiscal year, in the face of uncertainties brought on by the West Asia conflict, India VIX jumped to 28, indicating increased volatility and fear on the market.

Section 4: The West Asia War - Crude Oil, Rupee, Forex Reserves, Trade Deficit and Current Account

The single most consequential development of the second half of FY2025-26 was the outbreak of conflict in West Asia on February 28, 2026, involving Israel, the United States, and Iran. Its impact on India was immediate and wide-ranging, touching energy prices, the currency, foreign capital flows, inflation projections, and the central bank's policy stance.

India's Crude Oil Dependency

To understand why this mattered so much, it is important to understand India's oil structure. India consumes approximately 5.8 million barrels of oil per day, making it the world's third-largest oil consumer. Domestic crude production stands at roughly 700,000 barrels per day, meeting only about 13% of total demand. The remaining 88% to 89% is met through imports, with India ranking as the world's second-largest crude oil importer.

In absolute terms, India imported approximately 4.6 million barrels of crude oil per day in FY23. By FY26, this number had grown to approximately 4.8 to 4.9 million barrels per day. India's total oil import bill in FY25 stood at approximately $143 billion. With crude prices rising sharply in FY26's final quarter, the import bill for the full year moved significantly higher.

India's major crude oil suppliers include Iraq, Saudi Arabia, Russia, the UAE, the United States, and Kuwait. Russia's share of India's crude imports had surged after 2022, at one point accounting for 30% to 40% of total imports, before settling at a lower level. About 70 percent of crude imports now come from routes outside the Strait of Hormuz compared with about 55 percent earlier. India imports about 60 percent of its LPG consumption and out of these imports about 90 percent come through the Strait of Hormuz, which has been impacted due to current happenings.

The Crude Price Surge

Brent crude, which had been trading around $60 to $70 per barrel for much of FY25 and the early part of FY26, crossed $110 per barrel following the outbreak of hostilities in late February 2026. By mid-March 2026, it had peaked around $105 to $115 per barrel, a rise of over 50% from its pre-conflict level. Every $10 per barrel increase in crude oil prices is estimated to push India's retail inflation higher by approximately 0.60 percentage points, making the surge a direct threat to the RBI's inflation management.

Rupee Depreciation

The rupee had already been weakening before the conflict, driven by US tariff uncertainty, FPI outflows, a widening trade deficit, and elevated gold imports. The West Asia conflict accelerated the slide sharply.

Over the entire financial year FY2025-26, the rupee depreciated over 11% against the US dollar, the steepest fall since FY2012 when it fell 12.4%. The rupee hit a record low of ₹93.94 per dollar on March 23, 2026, and subsequently breached ₹95 intraday, with ₹95.22 as the intraday low. It recovered partially after the US announced a two-week suspension of military strikes against Iran on April 8, 2026, but the structural pressures remained.

The currency's depreciation had multiple effects. It increased the cost of all imports, particularly oil. It reduced the real returns for foreign investors, accelerating outflows. It pushed up the current account deficit and created imported inflation pressure that the RBI could not address through rate cuts.

RBI Intervention

The RBI intervened actively in the foreign exchange market to manage the pace of depreciation, with market estimates suggesting total dollar sales of around $55 billion through January 2026. In March alone, intervention was estimated at $26–27 billion. The central bank also shifted its strategy towards regulatory tightening by instructing banks to cap their net open positions at $100 million, effective April 10, 2026.

Despite these efforts, forex reserves have moderated from their peak of around $700 billion to approximately $682 billion, as highlighted by the RBI Governor during the April 8 MPC meeting, providing an import cover of nearly 11 months. The decline reflects both valuation changes and active market intervention.

Trade Deficit and Current Account

India’s current account deficit (CAD) remained moderate through much of FY26, with H1 FY26 CAD at 0.8% of GDP, supported by strong services exports and robust remittance inflows. In Q2 FY26, the CAD stood at 1.3% of GDP, improving from 2.2% in the same period last year.

However, the recent rise in crude oil prices has altered the outlook. With energy imports expected to increase and export demand facing uncertainty, the CAD for FY27 is projected to widen towards 1.5%–1.8% of GDP under a higher oil price scenario, compared to earlier expectations of around 1.2%–1.3%.

Section 5: Fiscal Health - GST, Direct Tax, Government Finances

Despite the disruptions in the second half of FY26, India's fiscal position remained on a strong base for the year overall. Tax collections were broadly on target, the fiscal deficit was being managed within the glide path, and credit rating agencies acknowledged the government's fiscal discipline with upgrades.

GST Collections

The total gross Goods and Services Tax (GST) collections grew 8.8% to over two lakh crore rupees in March this year as compared to the same month last year. The total gross GST revenue in March 2025 was over ₹1.83 lakh crore

According to the Finance Ministry, the Central GST collection in March this year stood at ₹40,549 crore and State GST is at ₹53,268 crore. The Integrated IGST collection amounts to over ₹1 lakh crore.

Meanwhile, Gross GST revenues rose to ₹22 trillion in the financial year 2025-26, an 8.3% increase over ₹20 lakh crore recorded last year.

Direct Tax Collections

By March 17, 2026, direct tax collections had risen 7.1% year on year to ₹22.8 lakh crore, according to provisional data, indicating that the full-year direct tax collection would likely exceed or be in line with the budget estimate.

Gross direct tax collections rose 4.8% to ₹27.15 lakh crore during this period

Fiscal Consolidation and Credit Rating Upgrades

The government maintained its commitment to the fiscal consolidation path. Capital outlays reached nearly 60% of the full-year budget allocation by November 2025. Revenue expenditure growth remained contained. Sovereign bond yields declined, with the spread over US bonds falling by more than half over the year.

The government's fiscal discipline was recognised internationally. S&P upgraded India's credit rating from BBB- to BBB during FY26. CareEdge Global, in its first coverage of India, assigned a BBB+ rating. These upgrades reflected India's robust economic performance, improving tax buoyancy, and the credibility of its fiscal management approach.

Section 6: Government Initiatives and Policy Actions

Across FY2025-26, the government undertook a series of structural and policy measures that supported economic activity, expanded the tax base, and strengthened India's position in global trade.

Income Tax Rationalisation

The Union Budget 2025-26 introduced the new Income Tax Act 2025 . The restructuring of personal income tax, combined with the GST rate rationalisation in September 2025, directly supported consumption demand while sustaining tax revenues in absolute terms. The Economic Survey noted that private final consumption expenditure's share in GDP rose to 61.5%, reflecting these policy tailwinds.

GST Rate Rationalisation

The GST Council implemented rate rationalisation effective September 22, 2025, simplifying the tax structure and reducing rates on a range of consumer goods. This directly impacted approximately 11.4% of the CPI basket, contributing to lower inflation and easing the cost of living for consumers. The reform also reduced compliance complexity for businesses, supporting the ongoing expansion of the GST taxpayer base.

RBI Liquidity and Rate Actions

The RBI's cumulative 125 basis point rate cut, combined with CRR reductions of ₹2.5 lakh crore, OMOs of ₹6.95 lakh crore, and forex swaps of around $25 billion, collectively provided significant monetary and liquidity support to the economy. These measures successfully transmitted lower lending rates, supporting credit growth and investment.

Response to West Asia Conflict

When the conflict broke out, the government took several steps to manage the energy price impact. Central excise duty on petrol and diesel was reduced by ₹10 per litre to support oil marketing companies absorbing losses from elevated global energy prices. While retail pump prices were kept unchanged, commercial diesel prices for bulk buyers rose, and aviation turbine fuel prices were increased by 25%. The government also encouraged states to reduce VAT rates to provide additional relief.

Conclusion

FY2025-26 captured both faces of India's economic story. For the first nine months, it demonstrated that strong growth, low inflation, disciplined fiscal management, and monetary easing could coexist. It showed that domestic demand, backed by a growing middle class, a maturing capital market, and a deepening digital economy, could sustain momentum even as global trade conditions turned uncertain.

The final quarter showed what India's vulnerabilities look like when tested. An economy that imports nearly 90% of its crude oil, runs a structural current account deficit, and remains subject to FPI mood swings does not have the luxury of ignoring a global energy shock. The rupee's 11% depreciation, the spike in crude prices, and the pause in the monetary easing cycle were not failures of policy. They were a reflection of India's exposure to a world that can change quickly.

The net reading for the year is still largely positive. GDP at 7.6%, the highest in recent years. Inflation at 2.1% for the year, the lowest in series history. Record GST and direct tax collections. Credit rating upgrades. Robust DII flows that cushioned the equity market. Forex reserves sufficient to cover 11 months of imports. A government that spent on capital assets without abandoning fiscal discipline.

FY27 begins with a harder starting point. But the foundations built in FY26 are not insubstantial.