India's economy grew 7.8% in the April–June quarter, its best start to a year since FY24. The strength is real. But inflation has quietly returned inside that number, which changes what we expect the Reserve Bank to do next.

8.2% Growth measured from the production side, vs 7.0% a year ago

11.9% Growth in business investment, roughly double last year

12% Export growth, twice last year's pace

18.3% Bank loan growth, mid-August

Key figures:

7.8% - Growth after stripping out price rises (6.9% a year ago)
10.3% - Growth in plain money terms (8.1% a year ago)

The difference between the two is inflation. It has widened to 2.5 percentage points from 1.2 a year ago. That is the single most important change in this release.

For two years, growth came without inflation. That has changed.

Through FY25 and FY26, India grew while prices stayed flat. Falling food and commodity prices meant almost all the growth was genuine extra output, which is a comfortable position, because it let the central bank support growth without worrying about inflation.

This quarter broke the pattern. Prices across the economy rose 2.3% against 1.1% a year ago. Farm prices went from flat to up 3.8%, industrial prices from slightly falling to up 3.9%. With output growing at 7.8%, the argument for keeping interest rates low weakens quickly.

Growth in money terms, growth after inflation, and the gap between them. Source: MoSPI, SBI Research, 31 August 2026.

Finance and real estate did the heavy lifting

Services grew 10%, led by finance, real estate and professional services at 12.1% (the fastest of any part of the economy). Manufacturing grew 9.2% and power generation rebounded sharply. Construction held up at 7.7%.

The two soft spots remained Farm output (slowed to 3.6%) which matters for rural demand. Mining shrank 2.4%, the only sector to contract.

Growth by sector, this quarter against the same quarter last year (%). Source: NSO, SBI Research.

Companies are spending on capacity again

The most encouraging number in the release is investment. Spending on new factories, equipment and infrastructure grew 11.9%, against 5.8% a year ago. Household spending held steady at 7.1% and exports grew 12%.

One caution. Restrictions on gold imports, brought in after the West Asia conflict escalated in February, have distorted the import and gold figures, as both fell in volume while rising sharply in value. Since imports are subtracted when calculating GDP, an understated import figure flatters the growth number. Our read is that genuine demand grew closer to 7% than 7.8% (still strong).

Where the spending came from, after inflation (%). Gold and import figures are distorted by import restrictions. Source: MoSPI, SBI Research.

Factories are making more and earning less on each unit

Manufacturers produced 9.2% more this quarter. But the prices they charged actually fell 1.4%, having risen 1.8% a year ago. Their costs, meanwhile, went up, due to higher crude oil feeds into fuel, plastics, chemicals and packaging. When costs rise and selling prices fall, margins compress.

This is a profitability signal, not a demand signal. Volumes are fine. It argues for owning businesses that can pass on cost increases (those with pricing power, contracted revenues or regulated tariffs) rather than manufacturing broadly. Some sectors have already begun raising prices: handsets, consumer goods and metals.

Change in selling prices by sector (%). Manufacturing is the only sector where prices fell. Source: MoSPI, SBI Research.

Banks are lending faster than money is coming in

Bank loans grew 18.3% in mid-August against 10.2% a year earlier. Deposits grew 14.7%. That 3.6 percentage point gap is the important part: banks funding loan growth need deposits, and they compete for them by raising rates. Deposit rates can rise before the RBI moves at all.

The two parts of the loan book worth watching are: i) Lending to non-bank finance companies grew 35.7% after shrinking last year, and ii) loans against gold jewellery made up Rs 909 bn of the Rs 2,436 bn of new personal loans between April and July (37% of the total, up 88% on last year). A loan book that concentrated in one commodity, at a time when gold import policy is being actively changed, needs monitoring.

Bank lending growth by borrower type (%). Source: RBI, SBI Research.

Why now a rate increase rather is more probable

Government borrowing gives no relief either. The Budget planned a deficit of Rs 16.96 lakh crore, 4.5% of the economy; after the West Asia crisis, SBI Research estimates Rs 17.35 lakh crore, or 4.6%. Though it is a small slip, but it means borrowing will not fall, hence, longer-dated bonds get no support from that direction.

Putting the pieces together: growth at 7.8% no longer needs help, prices are rising, loan growth is running at 18%, and borrowing stays high. SBI Research's conclusion, and ours, is that the RBI's next move is more likely a modest rate increase, brought forward rather than delayed. Growth is forecast to ease to 7.3%, 7.2% and 6.9% over the next three quarters. This should be seen as a high starting point working through and not a slowdown, which is exactly when a central bank feels able to raise rates.

Growth path for the rest of FY27: first quarter actual, remainder forecast (%). Source: SBI Research.

New lending, April–July 2026	Rs bn	Growth %
Industry	2,165	20.0
Personal loans	2,436	16.2
of which, loans against gold	909	88.1
Services	1,355	22.9
of which, finance companies	578	35.7
Agriculture	624	17.0
Total bank credit	7,167	19.3

Three things we are watching

1. Manufacturing prices next quarter.
   A second quarter of falling prices would confirm a lasting margin problem rather than a temporary oil-cost lag and would change which sectors we own.
2. The gap between loans and deposits.
   If it stays this wide, deposit rates rise on their own and bank profitability tightens even in a strong economy.
3. Gold import policy.
   Any easing would change both the growth arithmetic and the risk in gold-backed lending at the same time.