Positive Economic Outlook: Domestic Demand Fuels Growth in H2 FY26 with Support from Festive Sales and Government Spending

India’s economy is poised for steady growth in the latter half of the current financial year, driven by robust domestic consumption, despite ongoing global uncertainties. A recent report from SBI Capital Markets (SBICAPS) highlights that while external risks, including trade tensions, persist, the internal demand in India serves as a crucial stabilizing factor. The report also notes the impact of the United States imposing significant tariffs on Indian goods, prompting policymakers to focus more on domestic growth strategies.

Government Initiatives to Boost Domestic Consumption

Both the Union and state governments have ramped up capital expenditure in the fiscal year 2026, which is expected to lead to an increase in gross fixed capital formation. Recognizing the importance of domestic consumption, the government has strategically timed recent changes to the Goods and Services Tax (GST) to coincide with the festive season. The Confederation of All India Traders (CAIT) predicts that festive sales will reach a record Rs 4.75 trillion this year, with early indicators of this growth evident in the strong year-on-year increase in auto retail sales during the Navaratri period. This surge in consumer spending is seen as a positive sign for the economy, reinforcing the government’s focus on stimulating domestic demand.

Global Trade Dynamics and Economic Challenges

The SBICAPS report emphasizes the unpredictability of global trade, characterizing tariffs as the “new abnormal.” It notes a significant decline in Chinese exports to the U.S., which fell by 33 percent in August 2025 compared to the previous year. However, overall shipments from China increased by 4.4 percent, indicating a potential rerouting of supply chains rather than a complete disruption. While exporters and retailers have largely managed to absorb inflationary pressures, consumers are beginning to feel the effects. The U.S. has not imposed duties on essential sectors such as electronics and generic drugs, which could have further implications for trade dynamics.

Investment Trends and Monetary Policy Adjustments

The report also highlights a notable shift in global monetary policy, with central banks now holding more gold than U.S. treasuries for the first time in three decades. Although no strong alternative to the U.S. dollar has emerged, the Chinese yuan and digital currencies are gaining traction as countries explore new monetary anchors. The report warns that the rush to rebalance investments could lead to asset bubbles, particularly in sectors like artificial intelligence, where significant capital is flowing despite untested business models. The valuation of OpenAI, reaching $500 billion, exemplifies this trend, although the report advises caution regarding investment in such speculative conditions.

Domestic Credit Flow and Investor Confidence

In response to the evolving economic landscape, the Reserve Bank of India (RBI) has implemented measures to enhance credit flow. These include proposing the removal of sectoral caps on large borrowers and easing restrictions on acquisition finance. Additionally, the RBI has raised lending limits for loans against shares, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs). As a result of these initiatives, the credit-deposit ratio has surpassed 80 percent for the first time in fiscal year 2026. Despite foreign portfolio investors withdrawing $18 billion from Indian equities in 2025, domestic investors continue to demonstrate strong confidence in India’s growth trajectory, reflecting a resilient outlook for the economy.

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