Indian Economy Remains Resilient Amid Global Headwinds; Can the Resilience Sustain Through FY26?

India’s economic resilience once again surprised with a stronger-than-expected print of 8.2% for the quarter ended September, marking a six-quarter high. The GDP print beat the Reserve Bank of India’s and analysts’ expectations of a 7–7.2% rise. Nominal GDP, which does not adjust for inflation, stood at 8% for the first half (April–September) of FY26, as against 6.1% for the corresponding period last year.

The Indian economy showed continued strength for the second consecutive quarter amid global headwinds and ongoing worries about the India–US bilateral agreement. What helped the domestic macro fundamentals remain strong for two quarters even with a 50% tariff imposed by the US? The answer is deflator growth.

“The primary driver for the strong GDP print was the growth in deflator coupled with frontloading of exports to the US,” Gaura Sengupta, chief economist at IDFC First Bank, said. “The fall in shipping came only at the fag end of Q2, so the impact will likely be reflected in the Q3 growth.” The frontloading of exports to the US and increased production ahead of the festive season supported the manufacturing sector, which grew 9.1%, a sharp rise from 2.2% in July–September of FY25.

Tariff Worries Did Not Weigh on GDP Growth

Economists noted that the tariff issue has not weighed on India’s GDP growth in H1, as reflected in the stronger-than-expected GDP prints in the last two quarters. However, they flag caution amid ongoing uncertainty about the India–US trade deal and global pressures. “The tariff issue does not seem to have affected GDP growth as exports growth has been steady. The impact is more likely from Q3 onwards and we need to monitor future developments,” Madan Sabnavis, chief economist at Bank of Baroda, said.

Q3 Growth Likely to Be Dragged by Tariffs and Capex

According to Sengupta, slowed capital expenditure and the impact from reciprocal tariffs may result in a moderation of growth for the upcoming quarters and H2 (October–March). “Outlook remains favourable, the deflator for Q3 is expected to turn negative, and overall growth for FY26 is forecasted at 7.4%. The growth in deflator will continue to boost real GDP,” she said.

Sengupta noted the slowdown in government capital expenditure is due to revenue challenge and slowing down of tax collection of states. A report by the Comptroller and Auditor General of India showed that states have 26.3% of their budgeted capital expenditure in H1FY26. The report showed of the 20 states for which data is available, 18 states remained below 40% of their budget estimates in H1.

However, the continued uptick in rural and urban demand, along with growth in urban wages, will likely support the next quarter as well. A likely trade deal in December may further boost GDP expansion in Q4 and could maintain the 8% growth momentum. Even though bilateral trade talks between New Delhi and Washington have entered the final stage, it is still unclear when the deal will be finalised. “...There remain headwinds to growth that are yet to play out. Low nominal growth numbers (in the upcoming quarters) do signal that there is need for caution,” a report by HDFC Bank said.

Stellar Growth Calls for Policy Pause

Market participants remained divided until last week on the possible policy outcome by the RBI’s Monetary Policy Committee, scheduled to meet on December 3–5. Economists now say that although there is space for another rate cut, the economy does not “need” it right now, and maintaining a status quo while monitoring the impacts in the upcoming quarters will likely be the decision of the rate-setting panel. “We stand by status quo and neutral stance. What will be crucial is any commentary on forward guidance and exchange rate policy, as the pressure on the rupee and the RBI’s intervention in the foreign exchange market is draining systemic liquidity,” Sengupta noted.