A Goldilocks 2026

A recovery in cyclical demand and structural reforms can sustain the solid growth-benign inflation mix

- SONAL VARMA

(SONAL VARMA)

The year 2025 has been a challenging one for India. Real gross domestic product (GDP) growth was above expectations and the inflation rate was below the target. Butbeneath the surface, there was more turbulence.

At o per cent, India was singled out for American tariffs, domestic consumption softened, slowing nominal GDP growth weighed on revenues, large outflows in foreign-portfolio equity and a delay in the United States (US) trade deal have sustained the currency weakness, and the AI (artificial intelligence) exuberance has bypassed India. All considered, the economy has navigated this turbulence well, due to prudent macro policy choices, and the outlook for 2026 depends on five key questions.

Growth is important not only in itself but also because of its spillover effects on fiscal finances and in attracting more capital inflows. After a challenging 2025, we expect India’s cyclical growth to improve in 2026, supported by multiple factors.

Globally, we expect the Al-led investment boom and more supportive monetary and fiscal policies to set the stage for a strong 2026, led by the US and Europe. Domestically, low inflation is likely to remain a tailwind, boosting household real disposable incomes and supporting both consumption demand and corporate profitability. Unlike last year, when tight macro policies were a restraint on growth, the lagged effects of prior policy easing — repo rate cuts, liquidity, and credit easing — should boost growth. A likely trade deal with the US that lowers tariffs on Indian exports from 50 per cent to 20 percent will also be a positive.