Citi's chief economist on India's 2026 outlook: Goldilocks scenario to continue with some caveats

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India's 'Goldilocks' economic scenario of high growth and low inflation, which characterised 2025, is likely to extend into 2026, albeit with some moderation, according to Samiran Chakraborty, Chief Economist at Citi India. In an interview with CNBC TV18 kicking off the 'Outlook 2026' series, Chakraborty suggested that while the combination of over 7% growth and under 4% inflation could continue, the coming year might see slightly weaker growth and higher inflation.

Chakraborty explained that growth in 2026 might be a 'tad weaker' as the effects of the significant fiscal and monetary stimulus seen in 2025 begin to fade. On the inflation front, he anticipates a slight uptick due to mean reversion and base effects. However, he does not foresee inflation becoming a concern that would necessitate any policy tightening from the Reserve Bank of India (RBI).

Dissecting the surprisingly low inflation of 2025, which saw forecasts revised down from 3.8% to 2%, Chakraborty attributed the 180-basis-point drop primarily to idiosyncratic factors. "About 100 basis points is because of vegetable prices, 40 basis points is because of non-vegetable other food prices, and 40 basis points is because of core inflation, which is primarily due to the GST cut," he stated. He expressed caution about whether these 'lucky' circumstances, including benign vegetable prices and deflationary pressures from China, would align again in 2026. A key debate for the upcoming year, he noted, will be to determine whether the persistent low core inflation stems from improved supply-side dynamics or a lack of demand.

The depreciation of the rupee in 2025, despite strong GDP growth, was a significant anomaly. Chakraborty pointed out that for the first time since 1991, India is poised to record two consecutive years of a Balance of Payments (BOP) deficit, which has been the primary driver of the currency's weakness, overriding traditional valuation metrics like inflation differentials. Looking ahead, he projects a potential turnaround. "As we move into 2026 in the first quarter, the Jan-March quarter itself, there's a possibility that the BOP turns into surplus," he said. This shift, coupled with returning capital flows, could allow the RBI to establish a floor for the rupee. Citi has a 9-to-12-month target of around 91 for the currency, suggesting a move towards a more stable equilibrium.

However, a significant macro challenge looms over the bond market. Chakraborty highlighted a dramatic increase in government borrowing, with combined central and state bond issuance projected to exceed ₹30 lakh crore in FY27, a threefold increase from pre-COVID levels of around ₹10 lakh crore. This massive supply is expected to exert upward pressure on bond yields by widening the term premium.

To counter this, the RBI's intervention will be crucial. Chakraborty argued that the central bank would need to continue substantial support through Open Market Operations (OMOs) to manage liquidity and prevent rising borrowing costs from undermining its monetary policy objectives. "We have never seen a ₹6 trillion-year OMO from RBI. So that trend I suspect would have to continue if this bond market has to be supported," he concluded, indicating that while the growth-inflation balance remains favourable, managing the fiscal and external accounts will be the key challenge for India in 2026.