GDP for H1FY26 seen at 7.4 percent with full-year growth at 6.8 percent, says UBS note

GDP growth

India’s Gross Domestic Product (GDP) is expected to recover in the first half of the financial year to 7.4 percent, after hitting a low of 5.8 percent in the same period last year, a note by UBS Global Research has said.

However, the full-year FY26 real GDP growth could finally be at 6.8 percent, the report said, suggesting that the economic growth is likely to soften toward 6.3 percent in H2FY26 due to an unfavourable base, US tariffs and payback from front-loaded exports to the US, which UBS said is likely to outweigh the benefits of GST relief.

The recovery in growth is likely due to resilient domestic demand, adjustment in direct and indirect taxes, front-loading of government capital expenditure, supportive monetary policy and the tailwinds of a low GDP deflator, report added.

UBS also said India's nominal GDP growth may decelerate to 8.5 percent in FY26, the lowest since FY20 (excluding the pandemic). “Slower nominal GDP growth has already started affecting growth in corporate revenue, credit and tax collection this year,” report said.

Further, UBS expects household consumption growth to stay resilient, with an estimated $70 billion in stimulus during FY26-27.

Rural consumption has gained traction, said the note, with softer inflation boosting purchasing power, good monsoon improving crop outlook, along with welfare spend for women. The urban consumption may get support in upcoming quarters from recent GST rate rationalisation, personal income tax relief, front-loading of rate cuts, softer inflation (boosting purchasing power) and improved credit availability on regulatory easing, UBS report added.

Inflation Outlook

UBS expects inflation to average at a historical low of 2.4 percent compared with the 5.6 percent average registered during the last three years (FY23-25).

This is due to the softening of food inflation, neutral El Nino–Southern Oscillation (ENSO) conditions in 2025 following La Nina in early 2025 and a long stretch of El Nino weather (May 2023 to June 2024), low energy prices, concerns over China's excess capacity offloading in Asia amid US tariff uncertainty, and GST rate cut effective from late September.

For FY27, the inflation projection will likely move higher to 4.3 percent on an unfavourable base and normalisation of food inflation, though it will still be lower than RBI's forecast of 4.5 percent on year, the UBS report said.

“Stable oil prices and food supply conditions should keep headline inflation broadly contained,” report added.

Space for Another Rate Cut

The UBS Research note also sees space for another 25 bps rate cut by the Reserve Bank of India (RBI) in FY26, before a long pause in FY27.

“With underlying inflationary pressures remaining benign and considering the RBI's neutral policy rate assumption of 1.4%-1.9%, we see space for the terminal repo rate to fall to the 5.0-5.25% range,” report said.