S&P retains India's FY26 GDP forecast at 6.5%, expects 25-bps rate cut by RBI

Global ratings agency S&P Global Ratings has retained India's gross domestic product (GDP) forecast at 6.5% for 2025-26 (FY26) on strong domestic demand, favourable monsoon, GST reforms and the government’s infrastructure push. The ratings agency said India’s June quarter growth rate of 7.8% was better than it expected.

“We forecast India's GDP growth to hold steady at 6.5% this fiscal year (year ending March 31, 2026). We expect domestic demand to remain strong, supported by a largely benign monsoon season, cuts in the income tax and the goods and services tax, and accelerating government investment,” S&P said in its Economic Outlook Asia-Pacific Q4 2025 report.

S&P’s projections on growth are in line with the RBI’s real GDP growth estimate for 2025-26 at 6.5%, with Q1 at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%.

S&P says the U.S. tariffs on imports from different Asian economies will shape both their export outlook and their role in regional supply chains. It says India has been hit harder due to the US trade tariffs, while China has done relatively better. “Relative to our June assumptions on U.S. tariffs, China has so far fared somewhat better than other Asian economies, and Southeast Asian emerging markets somewhat worse. India has been hit much harder than expected, and the region's developed economies broadly as expected.”

In terms of investment, India ranks prominently. S&P says investment has been particularly buoyant in India, and Malaysia and Taiwan posted growth rates of up to 16% in the first half of 2025. However, in India, that strength stems from government investment, as private Capex remains sluggish.

Across Asia-Pacific, relatively resilient domestic demand should dampen the impact from stronger external headwinds following the increase in U.S. import tariffs and slower global growth.”

On the supply side, India's growth was supported by services and manufacturing, while on the demand side, it was driven by both private and government consumption. For FY26, many financial institutions have projected GDP growth of 6.5%, driven by a favourable monsoon, GST rate rationalisation, and an easier monetary policy.

The current geopolitical situation with the US certainly poses hurdles in India’s push for export-oriented manufacturing, says the report. “Using the same benchmark--relative to the pre-Trump administration situation--we estimate that India's effective U.S. tariff has increased quite a bit more than that on the rest of Asia, challenging its plans to expand its role in export-oriented manufacturing.”

Offsetting the impact of weak exports is resilient domestic demand, with the effect particularly strong in emerging markets less reliant on goods trade, such as India, the report adds.

S&P expects China's economy to slow to about 4% year-on-year in the second half of 2025 and 2026 on weakening exports, tepid organic domestic demand, and contained macro stimulus. “Downward pressure on prices will persist.”

Inflation forecast for India down to 3.2%

S&P says inflation has generally been modest in Asia-Pacific since early 2024, and has eased further in recent months in several economies, in part because of softer commodity and energy prices. “We expect consumer inflation to remain low, partly because of redirection of exports away from the U.S.”

For India, the ratings agency revised its inflation forecast down to 3.2% for this fiscal year after a sharper-than-expected decrease in food inflation. “This leaves room for further monetary policy adjustments, and we anticipate a 25-bps rate cut by the Reserve Bank of India this fiscal year.”

Notably, the RBI in its last MPC meeting had projected the CPI inflation for 2025-26 at 3.1%, with Q2 at 2.1%; Q3 at 3.1%; and Q4 at 4.4%. For FY27, the CPI inflation is projected at 4.9%, with the risks evenly balanced.

U.S. tariffs hit Asia-Pacific exports

S&P says higher U.S. import tariffs and the uncertainty about them will harm trade, investment and growth in the U.S. and elsewhere. In the U.S. itself, the tariffs raise inflation, it says, adding that as growth slows and the labour market softens, the U.S. Federal Reserve could stage two more 25 basis point (bps) cuts to the policy rate in 2025, following the September one. “We now expect two more such cuts in 2026.”

Compared to the situation before the Trump administration's tariffs, all Asia-Pacific economies face much higher effective U.S. tariffs, according to the ratings agency. “The rise is higher for China than for Southeast Asian emerging markets and developed economies, and currently even higher for India. But we think the risk of further changes in U.S. tariffs, and thus these relative positions, is high.”