Even though the RBI has projected the Indian economy to grow 6.5%, the ratings agency ICRA has retained its earlier forecast of 6.2% in the financial year 2025-26, assuming well-distributed monsoons and crude oil prices averaging around $70/bbl. "While ICRA maintains India’s GDP growth forecast for FY2026 at 6.2%, the downside risks have risen," the ratings agency says in its latest report on the Indian economy.

However, geopolitical tensions in West Asia, volatility in financial markets, and uncertain trade policies pose downside risks to the growth outlook. Though the US has been able to broker a ceasefire between Israel and Iran after 12 days of intense war, the threat to oil supplies remains. The volatility in the financial market could also deter investments. The unpredictable trade policies initiated by the Trump administration have also led to fears of a greater impact on the domestic economies in emerging markets.

The RBI’s and GoI’s forecast for the GDP growth rate for FY 2025-26 is 6.5%. The ratings agency, in its rationale for retaining the GDP forecast, says the economic activity has displayed a "mixed trend" in the first two months of FY2026, with only nine of the 17 non-agriculture indicators showing an improvement over Q4 FY2025, even as the output of summer crops is estimated to grow at a healthy pace.

While rains have picked up after a hiatus in early June, the spatial and temporal distribution remains crucial to support favourable kharif sowing and sustain rural demand. ICRA feels the prospects for urban consumption remain bright owing to income tax relief, rate cuts, and softening food inflation. India’s economic activity surged in June 2025, as Indian companies scaled up output in response to faster increases in total new business intakes and international sales, as per the latest HSBC’s flash Purchasing Managers’ Index (PMI) Survey. It shows India's economy is not just recovering but expanding steadily, driven by services, domestic demand, and better business confidence.

The ratings agency feels the CPI inflation, aided by the favourable monsoon forecast and likely dip in food inflation, is projected to cool to 3.5% in FY2026 from 4.6% in FY2025, lower than the RBI-led Monetary Policy Committee’s (MPC’s) forecast of 3.7%. The RBI, in its latest outlook on inflation, has pointed towards benign prices across major constituents. It believes the record wheat production and higher production of key pulses in the Rabi crop season should ensure an adequate supply of key food items. Also, the likely above-normal monsoon along with its early onset augurs well for Kharif crop prospects. "Reflecting this, inflation expectations are showing a moderating trend, more so for rural households," the RBI stated in this month's MPC statement.

Meanwhile, on the RBI's policy on the key repo rate, ICRA believes that while a pause is likely in August 2025, the possibility of a final 25 bps rate cut in October 2025 cannot be ruled out, given the subdued growth-inflation outlook. "Assuming an average crude oil price of ~$70/barrel in FY2026, India’s CAD is estimated to remain manageable at 1.1-1.2% of GDP in the fiscal."