Fitch Upgrades India’s GDP Growth Forecast to 6.9% Amidst Robust Domestic Demand
Fitch Ratings has updated its GDP growth forecast for India, raising it to 6.9% for the fiscal year 2025-26, up from a previous estimate of 6.5%. This revision comes amid ongoing trade tensions with the United States, which has imposed tariffs on Indian imports. Despite these challenges, India’s economy demonstrated strong momentum, with real GDP growth reaching 7.8% year-on-year in the April-June quarter. The service sector’s robust performance and increased consumption expenditure have been key contributors to this growth.
Economic Growth and Sector Performance
Fitch Ratings’ latest report highlights significant progress in India’s economic activity, with real GDP growth climbing to 7.8% year-on-year during the April-June quarter. This marks an increase from 7.4% in the previous quarter and surpasses Fitch’s earlier projection of 6.7%. The service sector has been a standout performer, achieving a growth rate of 9.3% year-on-year, compared to 6.8% in the previous quarter. Both public and private consumption expenditures have played a crucial role in driving this growth.
Additionally, the GDP deflator growth has reached its lowest level since the third quarter of 2019, at just 0.9% year-on-year. This reduction has narrowed the gap between nominal and real GDP growth. However, Fitch cautions that current real GDP figures may be inflated due to historical trends, particularly given the recent weakness in wholesale and commodity prices. Adjustments may be necessary if these prices rise in the future. Despite these uncertainties, the Purchasing Managers’ Index (PMI) indicators suggest a positive economic outlook, bolstered by improved industrial production in July.
Trade Relations with the United States
Recent developments in India-US trade relations have raised hopes for a resolution to ongoing trade tensions. US President Donald Trump expressed optimism about the negotiations aimed at addressing trade barriers between the two nations. In a post on Truth Social, he stated, “I feel certain that there will be no difficulty in coming to a successful conclusion for both of our Great Countries!” Prime Minister Narendra Modi responded positively, emphasizing the close friendship and partnership between India and the US.
The backdrop of these discussions includes the US imposing a 25% duty on Indian imports, which has created short-term uncertainty for businesses. While negotiations are expected to alleviate some of these tariffs, the current trade climate could impact business confidence and investment decisions in India. Both leaders are keen to finalize discussions that could unlock the potential of the India-US partnership, with Modi expressing confidence in achieving a prosperous future for both nations.
Inflation Trends and Monetary Policy Outlook
Inflation in India has shown signs of easing, with headline inflation dropping to 1.6% in July, the lowest level since June 2017. Core inflation has also decreased to below 4% for the first time in six months. Analysts attribute this decline to favorable conditions, including above-average monsoon rainfall and substantial food reserves, which are expected to keep food price pressures subdued.
Looking ahead
Fitch projects inflation to reach 3.2% by the end of 2025 and 4.1% by the end of 2026. In response to these trends, the Reserve Bank of India (RBI) is anticipated to implement a 25 basis point rate reduction towards the end of the year. This decision will be influenced by the effects of previous policy easing, with the RBI likely to maintain its stance until the end of 2026. Rate increases are expected to commence in 2027, reflecting a cautious approach to managing inflation and supporting economic growth.
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