Fitch Raises India’s FY26 Growth Forecast to 7.4%

Fitch Ratings has raised India’s growth forecast for the financial year 2025-26 (FY26) to 7.4%, up from its previous estimate of 6.9%. The agency pointed to strong private consumption as the main reason for this growth, as per a Moneycontrol report. Solid real income trends, improved consumer sentiment, and the effects of recent goods and services tax (GST) reforms are also playing a role in this growth.

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What Are The Reasons?

India’s GDP expanded by 8.2% in the second quarter of FY26, marking the fastest pace in six quarters. Fitch noted that domestic demand, especially consumer spending, remains the key engine of growth this year. For FY27, the agency expects growth to moderate to 6.4%, closer to India’s estimated potential growth rate. While public investment growth is likely to slow, private investment is projected to pick up in the second half of FY27 as financial conditions ease.

Trade Deal & Expectations

Fitch’s forecast for FY28 is a further softening of growth to 6.2%, as higher imports are expected to offset slightly stronger domestic demand. The agency highlighted that India faces significant external risks, including one of the highest effective tariff rates on its exports to the US, estimated at around 35%. Fitch stated that a trade agreement reducing this burden could boost external demand for Indian goods.

Inflation And Rate Cuts

On inflation, Fitch projects that consumer prices will average 1.5% in the current fiscal year, before rising to 4.4% in FY27. India’s consumer inflation fell to 0.3% in October, but base effects are expected to push inflation above the target by the end of 2026. The agency anticipates only a slight decline in inflation in 2027.

Fitch believes that falling inflation will allow the Reserve Bank of India (RBI) to implement one more rate cut in December, bringing the policy rate to 5.25%. This comes after 100 basis points of rate cuts in 2025 and a drop in the cash reserve ratio from 4% to 3%. However, with core inflation rising and growth likely to stay strong, Fitch expects the RBI to keep rates steady over the next two years.

Rupee's Historic Drop

The rupee’s recent drop toward the 90-per-dollar mark has made it harder to justify quick rate cuts, especially after the strong growth figures from the second quarter. The RBI’s Monetary Policy Committee will announce its rate decision on December 5. Fitch predicts that the rupee will strengthen next year to about 87 per dollar, compared to its previous forecast of 88.5 for 2025.

The agency highlighted that ongoing private spending will be vital for India's growth. Recent GST reforms have helped increase tax compliance and revenue collection. This supports government finances and allows for continued investment in infrastructure. Fitch expects public investment to moderate in the near term, but anticipates that private sector investment will gradually recover as financial conditions improve.

India’s export sector remains vulnerable to global trade tensions and high tariff barriers, particularly in the US market. Fitch noted that a reduction in these barriers through a trade agreement could significantly boost India’s external demand. The agency also highlighted the importance of managing inflation expectations, as higher inflation could constrain the RBI’s ability to support growth through monetary policy.