Economic growth looked strong in Q2FY26, but momentum in digital payments tapered in September

Indian economy logs a strong second quarter

India’s economy has extended its robust performance into the second quarter of FY26, even as some indicators have showed moderation in September, as per the high-frequency data released on October 1.

Manufacturing Eases but Still Strong

The HSBC India Manufacturing PMI eased to a four-month low of 57.7 in September, compared with 59.3 in August. Still, the quarterly average of 58.7 was among the highest since the survey began.

“The September headline index softened, but it remained well above the long-term average. New export orders increased at a faster rate in September, indicating demand outside of the US might be offsetting any decline from tariffs,” said Pranjul Bhandari, chief India economist, HSBC.

While new orders grew at a slower pace, business optimism on the back of GST cuts has improved, rising to a seven-month high in September 2025.

GST and Tax Buoyancy

The GST revenue collections were a positive indicator, rising 9.1 percent on-year in September to Rs 1.89 lakh crore, the fastest pace of growth in four months.

“The increase in gross GST collections to Rs1.89 lac Crores for the month indicates that there has not been any significant slowdown in economic activity in anticipation of the GST rate cuts during the month of August 25," MS Mani, Partner, Deloitte India.

Digital Payments Lose Some Steam

The trends in digital transaction have shown signs of some cooloff, even though the UPI volumes have risen 33 percent on-year in Q2FY26 while values rose 20.9 percent. During September, UPI transactions slipped to 19.6 billion from 20.01 billion in August, with FASTag volumes too easing, growing at a slower pace of 4.6 percent in September from 12.8 percent in August.

Autos and Tractors Lift Sentiment

The auto sector capped the quarter on a strong note, with PV maker Tata Motors reporting a 10 percent growth in domestic dispatches in Q2FY26 while September sales rose over 40 percent, and EV shipments doubled. Leading SUV maker Mahindra & Mahindra saw a 10 percent rise in September passenger vehicle sales, with a 21 percent increase in light commercial vehicles and a 30 percent jump in three-wheelers. Ashok Leyland reported a 7 percent rise in sales. Two-wheeler makers too gained ground, with Bajaj Auto posting a 5 percent rise in September sales.

The rural economy stood out, as tractor sales surged over 40 percent across businesses, with Escorts Kubota registering its highest-ever monthly sales in September at a 50 percent growth. Despite the September data showing some slowdown, broader domestic demand remains resilient.

The Reserve Bank of India on October 1 raised India’s growth forecast to 6.8 percent from 6.5 percent expected earlier. The central bank expects the economy to log another 7 percent growth in Q2FY26, after recording a 7.8 percent growth in the previous quarter.

“As suggested by high frequency indicators available so far, domestic economic activity continues to sustain momentum in Q2:2025-26,” RBI governor Sanjay Malhotra said in his statement, adding that demand is expected to get a boost from GST rationalisation.