ADB lowers India’s FY26 growth forecast to 6.5% amid US tariffs.
Strong Q1 GDP growth of 7.8% driven by consumption and spending.
Exports hit by 50% US tariffs, but services and domestic demand cushion.
Fiscal deficit may exceed target, inflation eases to 3.1% on food prices.
With the impact of US tariffs on Indian exports slated to reduce prospects especially in the second half, the Indian economy is expected to grow at 6.5%in the current fiscal year, the Asian Development Bank (ADB) said on Tuesday. This comes despite a strong growth of 7.8% in the economy, noted in the first quarter of this year.
According to the Asian Development Outlook (ADO) of the ADB released in April, a higher growth rate of 7 per cent was projected. However, that was lowered to 6.5 per cent in the July report due to concern regarding a steep 50 per cent US tariffs on shipment from India.
The GDP is expected to witness a strong growth in the first quarter (Q1) of FY26 at 7.8 per cent on improved consumption and government spending. However, additional US tariffs on Indian exports will reduce growth, particularly in the second half of FY26 and in FY27, though resilient domestic demand and service exports is expected to cushion the impact, ADO September 2025 stated.
It further noted that the reduction in exports will impact India's GDP in both FY26 and FY27 as the tariffs are implemented. Thereby, net exports will subtract from growth more than previously forecast in April, it said.
However, it also mentioned that the impact on GDP will be limited by a relatively low share of exports in GDP, increased exports to other countries, continued robust services exports that are not directly affected by tariffs, and a boost to domestic demand from fiscal and monetary policy.
Additionally, ADO also anticipates that the fiscal deficit is likely to be higher than the budget estimate of 4.4 per cent of GDP on account of reduced tax revenue growth partly because of GST cuts, which were not included in the original budget while spending levels are assumed to be maintained, pushing up the deficit.
Nevertheless, it said the deficit will likely be lower than the 4.7 per cent of GDP recorded in FY25.
In addition to that, the current account deficit will widen from 0.6 per cent of GDP in FY25 but remain moderate at 0.9 per cent in the current fiscal and 1.1 per cent in FY27.
"Import growth will be muted, with lower net petroleum imports due to lower Brent crude prices. Growth in service exports and remittances will be robust, but overall exports will be lower. Net capital inflows are also likely to be lower in both fiscal years due to global economic uncertainties. These trends may draw down international reserves, which will nevertheless remain robust," the ADO said.
On inflation, it said that the forecast is lowered to 3.1 per cent for the current financial year, after food prices declined more quickly than expected.
Core inflation is expected to remain close to 4 per cent in FY26, the ADO said, while adding that the inflation forecast for FY27 is raised, as food price increases are expected to return increasingly to the long-term average inflation rate.
Consumer inflation eased to 2.4 per cent year on year in the first 4 months of FY26 as food price inflation moderated and this prompted the Reserve Bank of India to undertake large policy rate cuts to support growth, it noted.
After keeping the repo rate steady at 6.5 per cent for almost 2 years, the Monetary Policy Committee (MPC) cut the rate by 25 basis points in February and again in April 2025 and by 50 basis points in June, reducing the repo rate to 5.5 per cent, the lowest since August 2022.
The MPC further announced a 100-basis-point cut to the cash reserve ratio in four equal tranches during September and November 2025 to enhance bank liquidity, it said.
