ICRA Retains India's FY26 GDP Forecast At 6.2% Amid Rising Global Risks

New Delhi: Credit rating agency ICRA retained India’s FY2026 GDP growth forecast at 6.2% despite mixed economic activity and rising global risks. CPI inflation is expected to ease to 3.5 per cent with a possible final rate cut in October. Rural and urban demand show improvement, while government capex drives investment amid weak external demand.

According to ICRA's June report, economic activity has displayed a mixed trend in the first two months of FY2026, with only nine of the 17 non-agri indicators showing an improvement over Q4 FY2025, even as the output of summer crops is estimated to grow at a healthy pace.

The early onset of monsoons in May 2025 partly weighed upon the performance of the electricity and mining sectors. While rains have picked up after a hiatus in early June, the spatial and temporal distribution remains crucial to support favourable kharif sowing and sustain rural demand, added the report.

Monsoon in favour

With normal monsoon predictions, the prospects for urban consumption remain bright owing to the income tax relief, rate cuts and softening food inflation. However, global risks remain elevated amid geopolitical tensions in West Asia, volatility in global financial markets and lingering uncertainty around tariff policies, posing headwinds to domestic growth. While ICRA maintains India’s GDP growth forecast for FY2026 at 6.2%, the downside risks have risen.

Aided by the favourable monsoon forecast and likely dip in food inflation, the CPI inflation is projected to cool to 3.5% in FY2026 from 4.6% in FY2025, lower than the Monetary Policy Committee’s (MPC’s) forecast of 3.7%. While a pause is likely in August 2025, ICRA does not rule out the possibility of a final 25 bps rate cut in October 2025, based on our subdued growth-inflation outlook. Assuming an average crude oil price of ~$70/barrel in FY2026, India’s CAD is estimated to remain manageable at 1.1-1.2% of GDP in the fiscal.

Key findings

FY2026 GDP Growth Outlook The GDP growth forecast for FY2026 is retained at 6.2%, assuming well-distributed monsoons and crude oil prices averaging around $70/bbl.

However, geopolitical tensions in West Asia, volatility in financial markets, and uncertain trade policies pose downside risks to this growth outlook, which have intensified Economic Activity Early trends in economic activity for Q1 FY2026 are mixed, with only nine of 17 non-agricultural indicators showing improvement compared to Q4 FY2025. The early onset of monsoons in May 2025 partially affected the electricity and mining sectors.

The outlook for rural demand appears positive in the near term, boosted by cash flows from the rabi harvest. Retail sales of two-wheelers and tractors showed year-on-year expansion in April-May FY2026, reversing contractions from the previous quarter. Prospects for urban consumption have significantly improved due to income tax relief, rate cuts, and easing food inflation.

Capex to boost growth

Government Capital Expenditure (Capex) The Government of India's (GoI) capital expenditure surged by approximately 61% year-on-year in April 2025. Additional fiscal flexibility could boost the GoI's on-budget capital expenditure growth to around 14% in FY2026, up from 6.6%. State governments are also expected to see healthy growth in their combined capital expenditure in FY2026.

Crude oil prices impact

A $10/bbl increase in the average crude oil price would lead to a $13-14 billion rise in net oil imports, increasing the CAD by 0.3% of GDP. A sustained increase in crude oil prices from current levels could negatively impact the profitability of Indian companies and lead to a downward revision in the GDP growth forecast. While Power Sector Electricity demand growth is projected to recover post-monsoon, reaching 5.0-5.5% in FY2026. Power generation capacity additions are estimated to increase to 44 GW in FY2026, suggests the report.