Fitch signals limited RBI easing room as inflation coasts lower, with a likely 25 basis point cut to 5.25% at the December policy meeting, while expecting the RBI to hold rates steady over the next two years amid rupee weakness.

Inflation is forecast to average about 1.5% in FY26 and rise to around 4.4% in FY27, with base effects pushing inflation above target by late-2026, leading Fitch to anticipate a single December cut and then a hold.

Fitch raises India’s FY26 growth forecast to 7.4% from 6.9%, propelled by stronger private consumer spending, rising real incomes, improved sentiment, and GST reforms.

Private consumer spending is identified as the main growth engine for FY26, supported by real income gains, positive sentiment, and GST policy changes.

The upgrade to 7.4% FY26 growth reflects a combination of robust private consumption, improving sentiment, and the GST reforms enacted from September 2022 (implemented from September 22).

External risks include high reciprocal tariffs on India-US trade, with a combined tariff burden around 50% in August, and the absence of a solid US-India trade pact adding to investor jitters.

Aside from tariffs, the elevated effective tariff on exports to the US (~35%) remains a risk, with a potential trade deal seen as a trigger for external demand.

Fitch views the RBI easing cycle as near its end, with policy likely to stay steady through the next two years.

Rupee depreciation looks contained, with a forecast around 87 per dollar by end-2026 and roughly 87–88.5 through 2027 after a record low near 90.29.

FY27 growth is projected to ease to about 6.4%, driven by domestic demand while private investment improves in H2 as financial conditions loosen.

For FY28, growth is expected around 6.2% as higher imports weigh on the outlook, even as domestic demand remains supportive.

India’s economy expanded 8.2% in Q2, marking the strongest pace in six quarters and outpacing forecasts, with real GDP growth continuing robust despite easing inflation.

The RBI policy decision due on December 5 will steer near-term direction, with cautious easing contingent on inflation data and currency stability.