The Asian Development Outlook (ADO) September 2025 report noted that GDP growth was strong in the first quarter of FY26, driven by robust domestic consumption and government spending, but rising US tariffs on exports are expected to moderate growth in the second half of the year and into FY27. Despite these challenges, net exports are expected to subtract only moderately from growth, supported by resilient service exports and increasing trade with other countries.

The report also highlighted that India’s fiscal deficit may exceed the budgeted 4.4% of GDP, partly due to slower tax revenue growth following recent GST adjustments. However, government spending has remained on track, with capital expenditure up 32.8% and current expenditure rising 17.1%. Subsidies overall fell 9.6%, while targeted increases, such as a 36.9% rise in fertiliser subsidies, aim to support agriculture.

The Reserve Bank of India (RBI) has taken measures to support growth, including lowering the repo rate to 5.5%—the lowest since August 2022—and reducing the cash reserve ratio by 100 basis points. These steps have led to lower lending rates on new rupee loans and decreased yields on 10-year government securities, promoting liquidity and investment.

Inflation is expected to remain moderate at 3.1% in FY26, with core inflation close to 4%. FY27 may see a slight increase in food price-driven inflation, but overall price stability is expected to continue.

India’s current account deficit is projected to widen modestly from 0.6% in FY25 to 0.9% in FY26 and 1.1% in FY27. Lower net petroleum imports, strong service exports, and remittances are expected to help maintain a stable external position. International reserves are anticipated to remain robust despite global uncertainties.

While foreign direct investment (FDI) inflows remain subdued amid trade volatility, the report emphasized strong domestic demand, supportive fiscal and monetary policies, and a resilient services sector as key factors sustaining economic growth.