India’s economy is expected to grow 6.5% in the current financial year, the Asian Development Bank said in its latest report, revising the earlier figure downwards from 7%.ADP had predicted the GDP to reach 7% in April but downgraded it as concerns arose surrounding the sharp 50% tariffs in Indian import to the country.This reduction comes despite the 7.8% growth in the first quarter as US tariffs start to weigh down Indian exports.
The ADO (Asian Development Outlook) by ADB said that while GDP grew strongly in the first quarter of FY26 boosted by consumption and government spending, additional US tariffs on exports will reduce growth, particularly in the second half of FY26 and in FY27.Net exports are expected to subtract more from growth than previously predicted in April. However, the overall impact will be limited due to the relatively small share of exports in GDP, rising exports to other countries, robust service exports, and supportive fiscal and monetary policies.Strong domestic demand and services exports will also help soften the impact, ADO September 2025 report added, as cited by PTI.
The report further expected the fiscal deficit to exceed the budget estimate of 4.4% of GDP, partly because of slower tax revenue growth following GST cuts that were not included in the original budget. Spending is assumed to remain at planned levels, which will push up the deficit, though it is expected to stay below the 4.7% recorded in FY25.From 0.6% in FY25, the country’s current account deficit is projected to widen to 0.9% of GDP this year and 1.1% in FY27.“Import growth will be muted, with lower net petroleum imports due to lower Brent crude prices. Growth in service exports and remittances will be robust, but overall exports will be lower. Net capital inflows are also likely to be lower in both fiscal years due to global economic uncertainties. These trends may draw down international reserves, which will nevertheless remain robust,” the report said.
Inflation
Coming to inflation, the ADB lowered its forecast to 3.1% for FY26 as food prices fell faster than expected. Core inflation is expected to remain close to 4%, though FY27 inflation is projected to rise as food prices return toward long-term averages.Meanwhile, the Reserve Bank of India cut the repo rate to 5.5%, the lowest since August 2022, and announced a 100-basis-point cut in the cash reserve ratio in four tranches to boost liquidity.As a result, lending rates on new rupee loans fell by 60 basis points from February to July 2025, and the yield on 10-year government securities dropped 32 basis points.Central government spending rose faster than revenue in the first four months of FY26, widening the fiscal deficit. Despite a 7.5% fall in tax revenue, central government income increased 4.8% due to a Rs 2.7 trillion dividend from the central bank.Expenditure rose 20.2%, with capital spending up 32.8% and current expenditure up 17.1%. Subsidies fell 9.6% overall, though fertiliser subsidies jumped 36.9% due to higher global prices.The report also noted that foreign direct investment inflows remained subdued amid global trade uncertainty.
