India’s economy is expected to grow faster than previously estimated, with Morgan Stanley upgrading its GDP growth forecast for FY26 to 6.2%, up from 6.1%, due to sustained strength in domestic demand and easing global trade tensions. The revision signals optimism about India’s economic momentum, particularly on the back of public spending, private consumption, and supportive policy frameworks.

According to Upasana Chachra, Chief India Economist at Morgan Stanley, India is poised to capitalise on internal economic engines amid lingering external uncertainties. “We upgrade our growth forecasts modestly to 6.2% for FY26 and 6.5% for FY27, reflecting a marginally improved external demand outlook due to de-escalation in US-China trade tensions,” she stated, reported Financial Express. 

India’s growth cycle is now in a phase of cyclical recovery, following a deceleration partially driven by policy tightening in the second half of calendar year 2024. Domestic demand—particularly consumption and investment—is expected to remain the primary growth driver.

Morgan Stanley noted that private consumption, which comprises around 60% of India’s GDP, showed significant improvement, growing by 6.7% YoY in the quarter ending December 2024, compared to 4.5% a year earlier. This recovery is underpinned by robust rural demand, improving urban consumption, and favourable inflation trends. Additionally, income tax cuts, an uptick in employment prospects, and rising credit off-take are expected to boost urban spending further.

Rural demand, bolstered by a favourable monsoon in 2024 and positive IMD forecasts for 2025, is also expected to remain strong, particularly supporting agricultural output and related consumption.

While public and household capital expenditure (capex) will lead the investment charge, private corporate capex recovery is expected to be more gradual. For FY26, India’s central government has earmarked ₹11.2 trillion for capital projects, keeping capex steady at 3.1% of GDP. When including grants to states, effective capital spending is forecasted to hit a record 4.3% of GDP.

However, private capex is facing hurdles such as tariff uncertainty and weaker global demand, which are negatively impacting investor sentiment and capacity utilisation.

On household investments, Morgan Stanley expects improvement following a mid-cycle consolidation, as access to credit improves with potential monetary easing by the RBI.

Trade outlook

Improved prospects for global trade, particularly following signs of US-China de-escalation, offer marginal uplift to India’s external demand. Drawing from past data, the report noted how trade tensions had dampened India’s export and industrial growth during 2018–19. A more stable global environment may help prevent similar slowdowns.

Nevertheless, Morgan Stanley warns that global trade growth remains fragile and tariff-related uncertainties could persist. India’s current account deficit is forecasted to remain modest at around 0.7% of GDP in FY26 and FY27, supported by subdued global commodity prices and resilient remittances.

One of the report’s most encouraging assessments is on inflation. Headline CPI inflation has averaged 3.6% so far in 2025, helped by falling food prices and seasonal factors. With food comprising nearly 46% of CPI, the outlook for cereals and pulses remains favourable due to expected strong monsoons.

Core inflation remains contained, and Morgan Stanley projects CPI to average 4% in FY26 and 4.1% in FY27, below the 4.6% seen in FY25. Wholesale inflation is also low at 1.9%, while household inflation expectations are at their lowest since May 2020.

Morgan Stanley expects monetary policy to remain accommodative, projecting a further 50 basis point reduction in the repo rate. This would bring the terminal rate to 5.5%, with the potential for deeper cuts if global headwinds, like a possible US recession, worsen India’s growth outlook.

Fiscal policy, meanwhile, will continue to prioritise capital creation, supported by stable macroeconomic buffers. The coordinated monetary and fiscal response is anticipated to provide the necessary tailwinds for India to stay on its upgraded growth trajectory.