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| Feb 2026
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INDIAN ECONOMY IN 2026-27
Neekanth Mishra
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What happened in FY2025?
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Trend GDP growth is around 7%, and monetary and fiscal policies
affect this trend. In FY 2025, we grew at about 6.5%, in spite
of 1.3% of fiscal consolidation, where the deficit was cut.
Government spending slowed down during the first part of the
year because it was election time. Later, the Government was
retiring off-Balance Sheet debt, with the Cess it was
collecting. Credit growth fell sharply mainly because of the
steps the RBI took, including instructions to banks regarding
unsecured loans. Liquidity tightened, which further caused a
slowdown. These monetary and fiscal activities caused a dual
impact on the slowdown of trend growth.
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Credit growth is finally starting to revive. Credit growth is
expected to remain around 13–14% in FY 2026, but it should pick
up in the next financial year, increasing economic momentum. The
centre and the state are taking steps to increase economic
output, for e.g., allowing women to increase their working
hours, speeding up compliance requirements for new companies,
etc. Further Fiscal Consolidation should be just 0.20%, meaning
government spending will not be cut too much.
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Car sales have picked up. Cement andsteel volumes are holding
up. Real estate volumes, which slowed down in 2024 and 2025, are
beginning to pick up again.Our investment cycle in the coming
years will be driven by real estate. Imports excluding gold and
oil look robust, clearly indicating economic activity on the
ground. Areas that are not performing well include weak power
demand and slowing retail sales of Fast Moving Consumer Goods,
air conditioners, and some typesof consumer durables, although
theeconomy is largely picking up.
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Growth has started picking up, but inflation has not. Economic
slack refers to the unused resources in an economy. India is the
only economy in the world where the labour force is growing
rapidly. Labour utilisation is the most important driver of
inflation. We are about 7-11% below our pre-pandemic path for
labour utilisation, meaning the economy has at least 1 year of
excess labour. Hence, labour has no pricing power, which is why
real wage growth is so weak and consequently, inflation is also
weak.
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monetary policy. The economy has enough slack to grow at 7-8%
for several years before sticky inflationary pressures emerge.
This does not consider reforms like the New Labour Policy,
improved compliance requirements, and considerable capacity
expansion in the financial services sector with reduced costs.
Food inflation depends on other unrelated factors, which could
cause food inflation to rise. China is dumping exports, which
keeps prices low. Therefore, increased demand should not
immediately result in inflation.
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Do we have a fundamental Balance of Payments problem? This time,
the rupee is weakening when inflation is low, and the Macros are
quite healthy.
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Current Account
Normally, when gold prices flare up, Indians reduce gold
purchases. As we are becoming richer, there are enough wealthy
individuals who can speculate on gold. Gold volumes have
stabilised, and the increased price has been offset by our lower
oil prices. If oil supply increases in 2026, prices can fall
further. There is concern that China's dumping is affecting our
exports. However, Services are rising 11-13% p.a. So, this isn't
really an issue on the current account.
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Capital Account
During the last 3 years, there has
been a rise in FDI repatriation.
Private equity and Venture Capital are achieving exits. MNCs are
finding that their Indian subsidiaries are worth more than their
holding companies and are taking some money off the table.
Foreign Portfolio investors have also been net sellers. This
should be temporary, as direct investors have started coming
back. Amazon, Microsoft and Google have all announced large
investments in India. There has also been a lot of strategic
investment in the Financial Sector. As corporate earnings start
rising, FPI investments should return to India.
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REER measures a country's currency strength compared to a basket
of foreign currencies, accounting for inflation to reflect real
purchasing power. It is the most important component of a
country's export readiness. This measure is at a 10-year low, so
there is nothing to worry about the Indian rupee.
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What is happening now is that when the RBI tried to stabilise
the rupee over a year ago, it sold forwards. After rolling them
over a couple of times, RBI is now squaring them off by selling
dollars. About US$20 billion remains to be settled.
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We are now heading into a period of competitive currency
debasement. The dollar is clearly overvalued, and the tariffs
are not working. Unlike in 1971 and 1985, other countries like
Japan and Europe will not allow the dollar to devalue unless
China also stops weakening its currency. Fortunately, India is
starting a bit weak, so it's not really a problem.
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1. As the Global Policeman pulls back, regional flare-ups occur,
such as the Thailand-Cambodia war, conflicts in Iran and
Venezuela, and the ongoing Russia-Ukraine conflict. Any of these
could cause the Oil prices to spike, which will affect our
Balance of Payments.
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2. We saw how disruptive the Indigo situation was, but
thankfully,
it did not last long. It was mainly due to excessive efficiency
versus resilience in the company. If any other disruption occurs
in a dominant firm in any sector, the government's opening up
could backtrack.
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3. The US could take the hard decisions to build infrastructure,
ease regulation, force consumers to spend less - but all this is
politically hard. Hence, there could be significant global
currency fluctuation problems as other tools stop working, and
the race to debase currencies for competitive advantage
intensifies.
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4. Analysis of China assumes that its manufacturing dominance is
in
the rear-view mirror as it is dumping so much. They are likely
to dump much more; for example, China produces 42 million cars a
year. The global car market is 84 million units, and China
produces 50% of that total. They aren't slowing down. When Xi
Jinping went to Korea, he stayed in a four-star hotel, which
signalled that China is expected to tighten its belt.
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5. Hence, we are in a period of global uncertainty and must
expect
intermittent economic shocks. But the drivers for growth remain
internal. If we manage our real estate cycle well and avoid
monetary and fiscal mistakes, the risks to our growth are
manageable.
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CONCLUSION
Barring global shocks, we anticipate increasing growth,
persistently lower inflation, lower long-term debt, and a more
stable rupee. A month ago, the RBI Governor, Sanjay Malhotra,
described the Indian economy as being in a "Goldilocks (not too
hot and not too slow) phase," with low inflation gradually
moving toward the 4% target and expected growth higher than the
long-term average.
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MARKET OUTLOOK
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Equity
Market
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In
Indian equity markets significantly underperformed global
markets, yet still delivered about 10% returns. The markets
have ended positively for ten consecutive calendar years,
starting in 2016. This has been the longest period in its
history without a negative return. Most fund managers are
unanimous on the following:
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1. After a period of global underperformance, India is
likely to outperform other markets this year.
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2. The Global System has become more sensitive to
disruptions. Strategic rivalry develops between countries,
and economic and trade decisions are increasingly shaped by
political and security considerations. India too would be
vulnerable to global shocks, although it is better placed to
withstand them.
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3. Over the next few years, expectations of the returns
from the equity market need to be tempered to around 10-12%.
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Debt
Market
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While
The rate cut cycle should be largely over, given benign
inflation and other macro priorities. The yield curve is likely
to flatten gradually. Yields are likely to be "lower for
longer," but not sharply lower. Hence, interest rates are
unlikely to move dramatically, anchoring expectations for yields
to consolidate rather than plunge.
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Precious Metals
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Gold and Silver experienced a parabolic rise in 2025 and at the
start of 2026, and the momentum could continue. Volatility has
also increased, leading to sharp downturns that have
subsequently been bought into. This upturn indicates a lack of
confidence in fiat currencies. However, it would be prudent to
maintain the asset allocation and trim gold and silver exposure
at every stage as prices continue to rise.
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