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India's Economic Sweet Spot: Inflation Below 2% Amid 7.7% GDP Growth Forecast

A new HSBC report paints an optimistic picture for India's economy. It forecasts inflation will average below 2% in the next financial year, staying under the central bank's target. At the same time, official GDP growth is expected to hit 7.7%. However, the report cautions that growth could soften early next year as some temporary boosts fade.

Key Points: HSBC Forecasts India FY26 Inflation Below 2% and 7.7% GDP Growth

  • HSBC forecasts India's FY26 inflation to average just below 2%, well under RBI's target
  • GDP growth for FY26 is projected at 7.7%, though actual growth may be closer to 6.7%
  • Report suggests the fall in core inflation is more long-lasting than in past cycles
  • Growth may soften in March quarter due to fading GST impact and fiscal tightening
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India's FY26 inflation likely to average below 2 pc, GDP growth at 7.7 pc

HSBC report predicts India's inflation to average below 2% in FY26 with strong GDP growth of 7.7%, citing lasting core inflation decline and GST impacts.

"The Indian economy seems to have transitioned from hints of stagflation just a year ago, to a sweet spot now. - Pranjul Bhandari, HSBC"

New Delhi, Dec 2

India's inflation is expected to average just below 2 per cent in FY26 and to remain below the Reserve Bank of India’s 4 per cent target in FY27, a report said on Tuesday.

As the October inflation came in at 0.25 per cent, the report from HSBC Global Investment Research said that only one‑third of the impact of GST tax cuts has shown up in inflation so far and there is room for further decline in inflation.

"We don't think it's only about short-term GST tax cuts and low food prices. We believe the fall in core inflation in this cycle is more long-lasting than past episodes, and that this will influence monetary policy," the report said.

The research firm forecasted official GDP growth for FY26 at 7.7 per cent (up from 6.9 per cent earlier), with actual growth on the ground closer to 6.7 per cent.

Growth is likely to remain strong until December but could soften in the March quarter as the positive impact of GST cuts soften, fiscal spending tightens to meet deficit targets, and exports start to slow following the 50 per cent tariff, the report said.

"The Indian economy seems to have transitioned from hints of stagflation just a year ago, to a sweet spot now. The strong September quarter GDP print of 8.2 per cent benefitted from both a cyclical boost as well as statistical anomalies," said Pranjul Bhandari Chief India Economist/Strategist, ASEAN Economist.

On the cyclical front, strong rains, monetary easing, fiscal spending, and GST cuts, all came together nicely, she added.

"We estimate that two deflator issues affecting manufacturing and services sectors respectively, may have understated the deflator by 1.2ppt and overstated real GDP growth," the report said.

Meanwile, last week, Central government's Chief Economic Advisor, V. Anantha Nageswaran, said that India’s GDP growth for the financial year 2025-26 is likely to be 7 per cent or more as official figures showed that the country’s Q2 growth surged to 8.2 per cent after recording a robust 7.8 per cent rise in Q1.

- IANS

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Reader Comments

R
Rohit P
7.7% GDP growth forecast is impressive, but the report itself says actual growth might be closer to 6.7%. We need to be realistic. The "sweet spot" is good, but let's see if it translates to more jobs on the ground.
A
Aman W
Low inflation with strong growth is the dream combo for any economy. Kudos to the policymakers if they've managed this transition. The GST cuts seem to be working well. Fingers crossed for the March quarter.
S
Sarah B
Interesting analysis. The note about statistical anomalies and deflator issues affecting the GDP number is important. It's always wise to look beyond the headline figures. Still, the overall direction seems positive for India.
K
Karthik V
Hope the RBI takes note of this and cuts interest rates further. Lower loan EMIs would be a perfect boost for the housing and auto sectors. The economy needs sustained momentum.
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Nisha Z
While the macro numbers look great, I respectfully disagree that the average citizen feels this "sweet spot". Petrol prices are still high, and job market anxiety is real. Growth must be more inclusive.

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