India’s goldilocks situation can be sustained, with GDP growth expected to touch 7% in FY27, says Sonal Varma, Managing Director and Chief Economist for India and Asia ex‑Japan at Nomura. In a conversation with Christina Titus and Mahesh Nayak, she noted that uncertainty has now become the new normal.
With the Budget around the corner, the government’s fiscal consolidation path and the need to avoid complacency on economic reforms are key to watch, especially as US tariffs have created an opportunity that is pushing India to diversify its export markets. Excerpts:
How do you view 2025’s performance, particularly regarding growth and inflation surprises?
A lot of surprises in 2025. We anticipated a cyclical economic slowdown in India, as the previous year’s tighter macro policies were set to impact cyclical sectors, and we did get that slowdown as expected. We also anticipated that inflation would moderate, but a sharp deceleration was a surprise.
Disinflation is actually boosting real GDP growth closer to 8%, even though some cyclical sectors have slowed. Our GDP growth projections went wrong, giving a surprise. Secondly, anticipating aggressive tariffs from Trump’s first presidency, we expected India—as a key strategic partner for the US—to emerge as a major beneficiary.
India’s unexpectedly high tariffs in Asia, prolonged delays in sealing a US deal, and shifting dynamics in India-US and India-China relations have all surprised us.
With the US tariff threat still lingering, how do you expect this standoff to unfold?
Uncertainty is now the new normal. As economists, we typically don’t focus much on geopolitical developments, but now they are extremely important because of their influence on various parameters, and therefore they are spilling over into our macro forecasts.
What’s important is not your absolute tariff, but the relative tariff differential between one country and its competitor nations. Most of our competitors have lower tariffs. Therefore, whether the tariff is 50% or 100%, you are already outcompeted by those nations. The negative news on tariffs is already known.
If it can be addressed, that’s good. Otherwise, India is diversifying their exports to other countries, which is the right strategy. On the policy side, there were actions from the RBI and the government. We expect things to improve as the year progresses.
Expectations from 2026 Budget
Any expectations from the Budget in terms of policy?
We are watching out for two things. First, the fiscal consolidation side, because FY27 marks the initial year of India’s shift to debt targeting, creating uncertainty about what that means for the fiscal deficit. So our base case is that the government will meet the 4.4% fiscal deficit target by slowing expenditure in the last quarter, but the pace of fiscal consolidation from here is likely to slow.
We will also look for any complacency regarding economic reforms, as US tariffs have proven an opportunity, compelling India to diversify its exports.
Do you see a Goldilocks situation continuing for India?
Our view is that the Goldilocks situation can be sustained. Globally, we view US tariffs at their peak, with risks tilting toward lower rates over the next 12 months due to US inflation pressures, suggesting trade policy uncertainty will not worsen further—potentially easing deferred investments to sustain global growth.
Considering GST reforms and monetary stimulus, we project India’s GDP growth at around 7% for FY27, pending the impact of the new GDP series, to be released by late February.
India’s inflation is running too low, which is not good for some segments of the economy. Therefore, you need to have the right balance. I am seeing clear structural moderation, largely driven by softer core inflation.
Slower wage growth is keeping services inflation subdued, which in turn is anchoring overall prices. These structural factors underpin the ongoing goldilocks scenario, with our focus on underlying growth momentum poised for improvement.
On rate cuts
In this scenario, do you think the RBI will continue cutting down rates, or do you think it’s the end of the rate cut cycle?
We expect that the repo rate will come down by another 25 basis points. We may have a pause in February, followed by a final cut in April. So it’s not over, but the bulk of the easing cycle is behind us. The RBI is keen to ensure the transmission of the rate cuts; therefore, it has been extremely proactive in implementing liquidity-easing measures and will continue to do so.
Second, inflation remains benign, but we expect it to pick up gradually. However, inflation is not likely to exceed 4% until October. For 2026, we forecast average CPI inflation at 3.6%, remaining below the 4% target. We believe monetary policy will remain growth-supportive this year.
With forward market pricing a higher rate ahead, will the Fed stay on its easing path or shift in a way that will impact India?
The Fed is still expected to cut, and our base case is that it will deliver two rate cuts this year. Outside the Fed, other markets, including India, are pricing in potential rate hikes. In India, markets view the easing cycle as ended, with the next move likely a pause or hike. However, our analysis finds no case for a rate hike this year and maintains a bias toward further cuts.
Has the RBI changed its stance on the rupee in the last few days or months?
I don’t think, but the strategy changes at different points in time. In general, the RBI has allowed more flexibility on the currency compared to 2024. Within that flexibility, there are periods when they are more flexible and others when they are heavily defending a specific level.
The 90/$ level was psychologically important for the rupee. RBI’s decision to allow a breach—contrary to expectations of aggressive defence—risks behavioural shifts, potentially sparking a negative feedback loop that calls for more nuanced strategies within a flexible exchange rate regime.
Going forward, we expect near-term pressure to persist, after which we can see some appreciation. We forecast the rupee at 92 by March 2026 and retrace to 89.8 by December 2026 or March 2027.
Do you see private capex really picking up, and do you expect the consumption trend to continue?
High inflation previously stifled urban and rural consumption, but current moderation is boosting real disposable incomes, alongside rising credit growth that is supporting spending. Ultimately, durable consumption hinges on job and income growth.
Capex dynamics have evolved; it’s no longer a broad-based cycle but concentrated in specific pockets where it is picking up. The global trade environment is quite negative and deterring investments. Going forward, sustained consumption pickup is crucial, as firms hesitate to invest in new plants without clear demand visibility—especially at 75-80% capacity utilisation.
Despite a 125 bps rate cut, yields remain elevated, and concerns over gross supply persist. What’s the outlook from here?
The challenge is more on demand-supply dynamics. There will be even more uncertainty about the fiscal path ahead, given the slowdown in tax collections. Markets remain forward-looking, with concerns on large gross borrowing in FY27, rising redemption profiles, and muted demand fuelling demand-supply imbalances.
Typical steepening pressures at the end of the easing cycle, combined with fiscal worries, are already priced in. I expect the 10-year yield (6.60%) to trade in a range in the near term. Moreover, we will watch out for Bloomberg Global Aggregate index inclusion announcements and further RBI OMO actions, which can help the market.