India’s growth is anticipated to remain resilient, primarily supported by strength in domestic demand. This strength is expected to counter uncertainties emanating from the external environment, with broad-based consumption recovery and investment, particularly public and household capital expenditure, driving momentum. A report by Morgan Stanley maintained that policy support is likely to continue through easier monetary policy while fiscal policy prioritizes capex. With inflation projected to remain benign and macro stability is anticipated to stay within a comfort zone, underpinned by robust buffers, Morgan Sanley said that the Indian economy can leverage internal engines and proactive policy to sustain its growth trajectory.
Where do we stand on the growth cycle? Outlook affected by uncertainty and slower global growth
India’s growth cycle has been on a gradual cyclical recovery following a partially policy-induced slowdown in H2CY24. Upasana Chachra, Chief India Economist at Morgan Stanley, said, “We upgrade our growth forecasts modestly to 6.2 per cent YoY (vs 6.1 per cent) for F2026 and 6.5 per cent YoY (vs 6.3 per cent) for F2027 in view of the de-escalation of US-China trade tensions, which improves the outlook for external demand at the margin.”
A look at consumption recovery:
While the lingering uncertainty on the external front poses risks, Morgan Stanley said, domestic demand trends will be the key driver of India’s growth momentum. And within domestic demand, consumption recovery is expected to become more broad based with urban demand improving and rural consumption levels already robust. Consumption accounts for around 60 per cent of GDP and is the mainstay of the domestic demand story. Morgan Stanley noted that private consumption growth recovered to 6.7 per cent YoY in QE December 2024 on a Q4 trailing basis (from 4.5 per cent in QE December 2023), and is likely to remain well supported in the coming quarters.
Urban consumer demand has recently slowed down, mainly because companies are earning less, which has led to weaker wage growth—dropping to 4.3 per cent in the December quarter, from 13.3 per cent a year earlier. However, the brokerage firm said that the company earnings are expected to pick up, which should eventually lead to higher employee pay, though this may take 2–3 quarters. In addition, it added, an expected shift in monetary policy and easing of RBI regulations should make more funds available, boosting credit growth—especially in retail loans.
Rural consumption, on the other hand, has exhibited resilience, as suggested by high frequency data. The strong southwest monsoon supported both summer and winter crops in 2024, and the IMD’s prediction of an above-normal monsoon in 2025 augurs well for the upcoming cropping season.
“We expect consumption growth to become more broad-based as urban consumption improves thanks to the income tax cuts announced in the Budget, an improving job growth outlook, improved purchasing power as inflation remains benign and increased credit off-take, even as rural demand continues to hold up,” said Upasana Chachra.
Investment: Private capex to be slow
Within investments, the brokerage firms said, public and household capex is expected to be driving growth while private corporate capex is anticipated to recover gradually.
For FY26, the central government is planning to spend Rs 11.2 trillion on capital projects, keeping capex steady at 3.1 per cent of GDP, similar to FY25 levels. Total effective capital spending—which includes central spending and grants to states for infrastructure—is expected to reach a record 4.3 per cent of GDP in FY26, growing by about 17 per cent year-on-year. Also, Rs 1.5 trillion has been set aside as 50-year interest-free loans to support state governments.
In addition, household capex is also expected to improve after a mid-cycle consolidation. On private capex, Morgan Stanley said, the outlook has weakened, owing to tariff uncertainty affecting investor sentiment and weaker external demand weighing on capacity utilization.
Trade: Headwinds from tariff-related uncertainties
The latest developments on a faster and deeper than anticipated de-escalation in the US China trade conflict have improved the prospects for global growth and trade. Upasana Chachra said, “The impact on India’s growth cycle can be seen from the experience of 2018-19, when US China trade tensions arose. India’s overall exports declined 0.2 per cent YoY in 2019 vs +13 per cent in 2017 (before US-China trade tensions during President Trump’s first term). Not only exports but India’s overall capital goods imports – which can be tracked as a proxy for capex – also contracted 3.2 per cent YoY in 2019 vs +5.9 per cent in 2017. Further, industrial production growth also moderated to 0.7 per cent in 2019 from 3.5 per cent in 2017.”
Macro stability to remain benign
Inflation to remain benign
Inflation has been lower than expected currently, mainly on falling food prices helped by seasonal factors and better crop output. Since food makes up 45.9 per cent of the CPI, this is good news for inflation, especially for longer-growing crops like cereals and pulses. Further, a forecast for an above-normal monsoon in 2025 should also help keep food prices stable. At the same time, while core inflation has edged up at the margin, it remains well behaved, with limited risks of a sharp upturn, in view of favourable global commodity prices. So far in 2025, headline inflation has averaged 3.6 per cent, with food at 3.5 per cent and core CPI at 4.1 per cent. Wholesale inflation is also low at 1.9 per cent. Moreover, RBI’s latest household inflation expectations survey shows inflation expectations have dropped to their lowest since May 2020. “We expect inflation to track below the 4 per cent target for most of the months, and expect inflation to pick up a little from 1Q26. We expect CPI to average 4 per cent YoY in FY26 and 4.1 per cent YoY in FY27, lower than 4.6 per cent in FY25,” Upasana Chachra said.
Current account
The current account deficit is likely to be affected by a combination of higher tariffs (on US exports), lower demand (slower global growth and trade growth), and lower global commodity prices (partly owing to lower demand). “In our view, the current account deficit is likely to remain range-bound at ~0.7 per cent of GDP in F2026-27, well within policymakers’ comfort zone, with the presence of sufficient macro stability buffers, suggesting continued resilience of the external balance sheet,” the report maintained.
Policy response likely supportive of growth
According to Morgan Stanley, monetary policy support is expected to continue and be the first line of defense against the backdrop of concerns around domestic growth, while the inflation outlook remains benign. “We expect the RBI to ease rates an additional 50bps, leading to cumulative easing of 100bps, and therefore a terminal repo rate of 5.5 per cent. We note that risks are skewed to more cuts if growth risks are exacerbated by a US recession (not our base case) that further dents India’s growth trajectory,” Upasana Chachra concluded.