Indian economy to grow at 6.5% in FY26; US tariffs to weigh on exports: ADB

New Delhi: Despite a strong 7.8 per cent growth in the first quarter, the Indian economy is expected to grow at 6.5 per cent in the current financial year as the impact of US tariffs on Indian exports will reduce prospects, particularly in the second half, ADB said on Tuesday.

It is to be noted that the Asian Development Outlook (ADO) of the Asian Development Bank (ADB), released in April, had projected a higher growth rate of 7 per cent, which was lowered to 6.5 per cent in the July report on concern of a steep 50 per cent US tariffs on shipment from India.

While GDP grew strongly in the first quarter (Q1) of FY26 at 7.8 per cent on improved consumption and government spending, additional US tariffs on Indian exports will reduce growth, particularly in the second half of FY26 and in FY27, though resilient domestic demand and service exports will cushion the impact, ADO September 2025 said.

The reduction in exports will impact India's GDP in both FY26 and FY27 as the tariffs are implemented. As a result, net exports will subtract from growth more than previously forecast in April, it said.

However, it said, the impact on GDP will be limited by a relatively low share of exports in GDP, increased exports to other countries, continued robust services exports that are not directly affected by tariffs, and a boost to domestic demand from fiscal and monetary policy.

ADO also anticipates that the fiscal deficit is likely to be higher than the budget estimate of 4.4 per cent of GDP on account of reduced tax revenue growth partly because of GST cuts, which were not included in the original budget while spending levels are assumed to be maintained, pushing up the deficit.

Nevertheless, it said the deficit will likely be lower than the 4.7 per cent of GDP recorded in FY25.

The current account deficit will widen from 0.6 per cent of GDP in FY25 but remain moderate at 0.9 per cent in the current fiscal and 1.1 per cent in FY27, it said.

"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," it said.

On inflation, the latest ADO said, the forecast is lowered to 3.1 per cent for the current financial year, after food prices declined more quickly than expected.

Core inflation is expected to remain close to 4 per cent in FY26, it said, adding, the inflation forecast for FY27 is raised, as food price increases are expected to return increasingly to the long-term average inflation rate.

Consumer inflation eased to 2.4 per cent year on year in the first 4 months of FY26 as food price inflation moderated and this prompted the Reserve Bank of India to undertake large policy rate cuts to support growth, it said.

After keeping the repo rate steady at 6.5 per cent for almost 2 years, the Monetary Policy Committee (MPC) cut the rate by 25 basis points in February and again in April 2025 and by 50 basis points in June, reducing the repo rate to 5.5 per cent, the lowest since August 2022.

The MPC further announced a 100-basis-point cut to the cash reserve ratio in four equal tranches during September and November 2025 to enhance bank liquidity, it said.

As a result, bank lending rates on fresh rupee loans declined by 60 basis points from February to July 2025, while the yield on 10-year government securities fell by 32 basis points, it said.

It further said central government spending grew more strongly than revenue in the first 4 months of FY26, widening the fiscal deficit from the same period of FY25.

Despite a decline in tax revenue by 7.5 per cent as direct tax collections fell, central government revenue rose by 4.8 per cent on a Rs 2.7 trillion dividend received from the central bank. Expenditure increased by 20.2 per cent as capital spending rose by 32.8 per cent and current expenditure grew by 17.1 per cent.

Subsidies declined by 9.6 per cent as food subsidies fell in the quarter, while fertiliser subsidies increased by 36.9 per cent as global prices increased for di-ammonium phosphate.

It also pointed out that the foreign direct investment inflows remained muted amid global trade uncertainty.