Strong domestic demand: Fitch revises India’s GDP growth outlook upwards to 6.9%; expects another RBI rate cut this year

Fitch Ratings has revised India’s GDP growth outlook for FY 2025-26 upwards to 6.9% from 6.5% in its latest report on World GDP Forecasts. Fitch is of the view that while the 50% US tariffs on India add short-term uncertainty, in the long-term a trade deal is likely to be negotiated.

Recent developments show heightened trade friction with the US, which has levied an additional 25% duty on Indian imports. Although negotiations are expected to reduce this tariff, the prevailing trade uncertainty could affect business confidence and investment decisions, Fitch said.


According to Fitch, India’s economic activity showed significant momentum, with real GDP growth climbing to 7.8% yoy in April-June quarter from 7.4% in January-March, notably exceeding the 6.7% projection in the June estimates of Fitch.

The service sector exhibited robust performance, recording 9.3% yoy growth compared to 6.8% previously, whilst consumption expenditure, both public and private, emerged as primary contributors.

The GDP deflator growth reached its lowest point since 3Q19 at 0.9% yoy, significantly reducing the gap between nominal and real GDP growth. Given the current weakness in wholesale and commodity prices, real GDP figures might be inflated based on historical trends, with potential adjustments likely if these prices increase.

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Nevertheless, PMI indicators suggest strong economic performance ahead, supported by improved industrial production in July. The implementation of Goods and Services Tax reforms from September 22 is anticipated to provide modest support to consumer spending through the current and subsequent fiscal periods, says Fitch.

“On the back of the 2Q25 outturn, Fitch has revised up its forecast for the fiscal year ending March 2026 (FY26) to 6.9% from 6.5% in the June GEO. Domestic demand will be the key driver of growth, as strong real income dynamics support consumer spending and looser financial conditions should feed through to investment. At the same time, annual growth will slow in the second half of the financial year, and so we expect growth to slow in FY27 to 6.3%. With the economy operating slightly above its potential, we expect growth will edge down to 6.2% in FY28,” Fitch said.

July witnessed headline inflation dropping to 1.6%, the lowest since June 2017, whilst core inflation decreased to under 4% for the first time in six months. Food price pressures are expected to remain subdued, considering above-average monsoon rainfall and substantial food reserves. Consequently, inflation is projected to reach 3.2% by end-2025 and 4.1% by end-2026. The Reserve Bank of India (RBI) is anticipated to implement a 25bp rate reduction towards year-end, while evaluating the effects of previous policy easing, maintaining this stance until end-2026. Rate increases are expected to commence in 2027, it said.

India-US trade deal talks

Signs of thaw in India-US trade tiff emerged on Saturday when US President Donald Trump said that India and the US share a special relationship. PM Narendra Modi responded by ‘deeply appreciating’ and ‘fully reciprocating’ President Trump's sentiments.

On Wednesday Trump posted on Truth Social, “I am pleased to announce that India, and the United States of America, are continuing negotiations to address the Trade Barriers between our two Nations. I look forward to speaking with my very good friend, Prime Minister Modi, in the upcoming weeks. I feel certain that there will be no difficulty in coming to a successful conclusion for both of our Great Countries!”

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PM Modi responded by saying, “India and the US are close friends and natural partners. I am confident that our trade negotiations will pave the way for unlocking the limitless potential of the India-US partnership. Our teams are working to conclude these discussions at the earliest. I am also looking forward to speaking with President Trump. We will work together to secure a brighter, more prosperous future for both our people.”