Fitch Raises India’s FY26 Growth Forecast to 6.9% on Strong Domestic Demand

Citing strong domestic demand and good financial circumstances, Fitch Ratings has raised its estimate of India's GDP growth for the fiscal year 2025–2026 from 6.5% to 6.9%. Following better-than-expected first-quarter results, the change was made. India's GDP grew 7.8% year over year in Q1FY26, up from 7.4% in the previous quarter.

Strong Q1 Data Drives Upgrade

The rating agency highlighted a notable surge in services output, which grew 9.3% compared to 6.8% previously. Both private and public consumption contributed significantly to this growth, with private consumption alone rising 7% during the April-June period. Investment activity also supported the expansion, reflecting continued confidence among businesses and consumers.

Risks and Challenges Ahead

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Despite the positive momentum, Fitch flagged potential risks arising from rising trade tensions with the United States. In August, the U.S. imposed an additional 25% tariff on certain imports from India. While Fitch expects the tariff to be negotiated down over time, it warned that such uncertainty could dampen investment sentiment.

Further evidence of a strong economic start comes from PMI surveys and industrial production data. The composite PMI index, a gauge of overall business activity, reached a 17-year high in August, while industrial output hit a four-month peak. Additionally, the recent GST reforms effective from September are expected to modestly boost consumer spending, contributing around 10 basis points to overall growth, according to experts.

Looking ahead, Fitch projects India’s GDP growth to moderate to 6.3% in FY27 and 6.2% in FY28. While domestic demand will remain the primary driver, the agency cautioned that the strong growth impetus observed in early FY26 may not fully sustain in the second half of the year.

Inflation and Policy Outlook

On the inflation front, headline inflation eased to 1.6% in July, marking the lowest level since 2017, supported by weak food prices and ample stockpiles. Core inflation fell below 4%. Fitch anticipates average inflation to remain around 3.2% by the end of 2025 and rise to 4.1% by end-2026. The Reserve Bank of India is expected to lower policy rates by 25 basis points toward the end of 2025, maintaining them steady until late 2026 before considering rate hikes in 2027.

Fitch has not yet upgraded India’s sovereign rating. Earlier this year, S&P Global Ratings raised India’s rating for the first time in 18 years, citing the country’s strong economic performance and prudent fiscal management.

Conclusion

India’s economy has started FY26 on a robust note, driven by strong consumption, services growth, and business optimism. However, trade uncertainties and moderating momentum in the second half of the year may temper growth prospects.