The Indian economy is expected to expand by 6.5% in the current financial year despite a strong 7.8% growth in the first quarter of FY26, the Asian Development Bank (ADB) said on Tuesday. The slowdown can be attributed to new US tariffs on Indian exports, which are likely to weigh on growth in the second half of the year, as per the report.
The Asian Development Outlook (ADO) had projected a 7% growth in April, but concerns over a 50% US tariff on Indian shipments led ADB to revise the forecast down to 6.5% in its July update.
“While GDP grew strongly in Q1 on improved consumption and government spending, 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 will cushion the impact,” the ADO September 2025 report said.
The reduction in exports will subtract from GDP growth more than previously estimated. However, ADB noted that the impact will be limited due to the relatively low share of exports in GDP, increased shipments to other countries, robust services exports, and support from fiscal and monetary policies.
The report also projected a higher fiscal deficit than the budgeted 4.4% of GDP, citing lower tax revenue partly due to GST cuts, while government spending is expected to remain elevated. The deficit, however, is likely to stay below the 4.7% recorded in FY25.
India’s current account deficit is expected to widen from 0.6% of GDP in FY25 to 0.9% in FY26 and 1.1% in FY27. “Import growth will be muted, with lower net petroleum imports due to softer Brent crude prices. Growth in service exports and remittances will remain robust, but overall exports will be lower,” ADB said, adding that net capital inflows may fall amid global uncertainties.
On inflation, ADB lowered its forecast for FY26 to 3.1% following a faster-than-expected decline in food prices. Core inflation is projected to stay near 4% in FY26, while inflation for FY27 is expected to rise as food prices return to long-term averages. Consumer inflation eased to 2.4% year-on-year in the first four months of FY26, prompting the Reserve Bank of India (RBI) to cut policy rates.
The Monetary Policy Committee (MPC) reduced the repo rate from 6.5% to 5.5% between February and June 2025, the lowest since August 2022. A further 100-basis-point reduction in the cash reserve ratio is planned in four tranches during September and November to boost liquidity. Bank lending rates on fresh rupee loans have fallen by 60 basis points, while the yield on 10-year government securities dropped by 32 basis points.
Central government spending outpaced revenue in the first four months of FY26, widening the fiscal deficit compared to the same period in FY25. While direct tax collections fell, total revenue rose by 4.8% due to a Rs 2.7 trillion dividend from the central bank. Expenditure increased by 20.2%, driven by a 32.8% rise in capital spending and a 17.1% increase in current expenditure. Subsidies declined by 9.6%, with food subsidies falling and fertiliser subsidies rising 36.9% amid higher global prices.
The report also noted that foreign direct investment inflows remained subdued amid global trade uncertainties.
Source Name : Economic Times