India's 2026 Growth Anchored by Domestic Strength Amid Global Risks

After a year of consolidation in 2025, the outlook for India is best described as stable, selective, and earnings-driven, with domestic demand acting as the primary anchor for growth.

Economic growth is expected to remain among the highest globally.

India's GDP is projected to expand by around 6.5-7.0 per cent in the current financial year 2025-26, supported by resilient consumption, services exports, and sustained public capital expenditure.

Inflation has moderated meaningfully and is expected to stay within the Reserve Bank of India's comfort band (2-6 per cent), allowing monetary policy to remain growth-supportive, it said. Crucially, India's earnings growth outlook remains intact, supported by improving balance sheets, declining leverage, and better return ratios across sectors.

While aggressive rate cuts appear unlikely, liquidity conditions are expected to stay comfortable, underpinning credit growth and investment activity.

Global developments, however, will continue to influence near-term sentiment. Markets are closely watching signals from the US Federal Reserve under new leadership.

"Although the macro picture entering 2026 is more balanced, we expect a volatile year where market moves will be dictated by earnings execution, the strength of domestic demand, and evolving policy clarity. Globally, near-term sentiment will hinge on signals from the US Federal Reserve under new leadership, particularly around the timing and pace of rate adjustments, while policy normalisation in Japan remains an important variable influencing cross-asset volatility," the report read.

Within equities, the market environment in 2026 is expected to be less liquidity-driven and more earnings-driven. Large-cap stocks are likely to remain in focus, offering better earnings visibility and stronger balance sheets amid volatility. Financials, capital goods, defence manufacturing, autos and select infrastructure-linked sectors are positioned to benefit from the ongoing domestic capex cycle and improving credit conditions. Consumption is expected to broaden gradually, with rural demand improving on the back of a normal monsoon and stable food inflation, though stock selection will be critical.

Any progress on India-US trade negotiations would be a positive for export-orientated sectors such as IT, pharmaceuticals, speciality chemicals and manufacturing, it added.

- ANI