India enters 2026 with a relatively well-coordinated fiscal–monetary framework. Nominal GDP growth has moderated from post-pandemic highs, but inflation is firmly under control. This gives policymakers room to support growth without destabilising macro fundamentals. Government policy continues to prioritise capital expenditure, particularly in infrastructure, energy, and rural support.

At the same time, the RBI is operating in a regime where real rates remain positive, but policy is no longer restrictive. With inflation benign, interest rates are likely to remain lower for longer, with any future easing remaining data-dependent rather than urgent. A key constraint remains the fiscal deficit anchor. While growth support is essential, fiscal discipline continues to act as the guardrail.

As a result, incremental growth impulses are likely to come from improved credit transmission, private capex, and a gradual revival in consumption rather than unfettered public spending.

GDP outlook

The NSO’s first advance estimate pegs FY26 real GDP growth at 7.4%, implying a moderation to ~6.9% in 2HFY26 after a strong first half. Growth remains services-led, with manufacturing also showing a meaningful recovery despite emerging external headwinds from US tariffs. Importantly, nominal GDP growth at ~8%, while lower than historical averages, has exceeded budgeted value assumptions due to base revisions, alleviating concerns around fiscal slippage. As one-off deflator distortions fade, we expect FY27E real growth to normalise toward ~6.5%, with nominal growth rebounding to ~10%, providing a healthier macro balance. (Source: Emkay Research)

PMIs cooling down, not a breakdown

High-frequency indicators point to moderation rather than stress. Manufacturing PMI slipped to ~55, a two-year low, reflecting softer output growth and weaker export momentum, though new orders remain resilient and cost pressures are subdued. Services PMI eased to ~58, still firmly expansionary, supported by domestic demand and steady export orders. The composite PMI at ~57.8 signals a gradual cooling from peak growth rather than a cyclical downturn, with subdued inflation and stable pricing power offering comfort on margins. (Source: Philip Capital Research)

Auto demand showing cyclical strength with structural tailwinds

Auto sales continue to surprise on the upside, reflecting healthy underlying demand post GST cuts, strong rural recovery, and successful new product launches. Passenger vehicles, especially SUVs and premium models remain the key growth driver. Two-wheelers have stabilised, while commercial vehicles and tractors are benefiting from improving utilisation, rural subsidies, and farm income support. Inventory levels are materially healthier than prior years, discounts are normalising, and the demand outlook into 2026 remains positive with double-digit growth visibility across segments.

Household savings to continue towards a structural equity shift

After a sharp multi-year rise, the share of equities in household savings has consolidated near ~28–30%, largely due to market mark-to-market effects rather than flow weakness. This pause does not signal a reversal. With low post-tax real returns on fixed income, rising financialisation, and sustained earnings growth, we expect equity share in household savings to trend toward ~45% over the next decade. Crucially, higher domestic ownership has enhanced market stability. DIIs now exceed FPIs in ownership and continue to act as a buffer during foreign outflows.

Balance of Payments are volatile but manageable

India’s external position remains resilient despite near-term volatility. The current account deficit forecast is maintained at ~1.4% of GDP for FY26E, supported by a robust services surplus and improving export diversification. FPI flows have been volatile and sensitive to rupee weakness and tight domestic liquidity, suggesting a choppy start to 2026. However, valuation premiums have compressed materially, and earnings visibility is improving, setting the stage for a recovery once currency stability returns. FDI, however, has weakened sharply, with net inflows falling to near multi-year lows as a share of GDP, reflecting global risk aversion and slower cross-border capital deployment rather than India-specific fragilities. We view this as cyclical rather than structural.

Ports, Trade & Real Economy Pulse

Real-economy indicators remain constructive. Port volumes continued growing, led by imports and sustained container growth, signalling steady domestic demand and trade throughput. GST e-way bill volumes have moderated sequentially, indicating post-festive normalisation rather than contraction. Freight rates remain stable amid benign fuel costs, while global container shipping rates have rebounded from recent lows. Collectively, these indicators suggest that while growth is moderating from peak levels, the underlying momentum of the Indian economy remains intact heading into 2026.