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Informist, Thursday, Jan. 9, 2025

NEW DELHI – The Indian economy is likely to fare better in 2025-26 (Apr-Mar) than in the current financial year, with growth expected to pick up from a four-year low and inflation seen moving closer to the Reserve Bank of India's medium-term target of 4%, according to Aastha Gudwani, India chief economist at Barclays.

"We expect FY26 to be a year that we had hoped FY25 to be," Gudwani said in a report on Thursday. "We anticipate GDP growth recovery and further softening of inflation."

Gudwani expects India's GDP growth to improve to 7.0% in FY26 from an estimated 6.2% this year. Barclays' GDP growth forecast for FY25 is 20 basis points lower than the 6.4% pegged by the government's first advance estimate, released earlier this week. Barclays' 6.2% growth forecast for the current year is 30 bps lower than its previous forecast of 6.5%.

GDP growth is seen at a four-year low this year after economic activity disappointed in the first half of FY25, even as modest improvement is expected in Oct-Mar, Gudwani said in the report. Next year, a favourable base, potentially easy monetary conditions, and a normal monsoon will help push GDP growth to 7.0%, she added.

Barclays expects CPI inflation to fall to 4.2% in FY26 from its revised estimate of 4.8% for this year on the back of lower food inflation. The 4.8% inflation forecast for FY25 is 30 bps higher than Barclays' previous projection and in line with the RBI's forecast.

Food inflation is likely to moderate to 5.4% in FY26 from over 7% this year, mostly dragged lower by a favourable base effect through a large part of the summer, Gudwani said. "The vegetable price shock that led to a sharp increase in headline inflation marking a large divergence versus estimates, is correcting. We believe inflation has peaked," Gudwani said. 

With inflation expected to moderate and growth seen rising, the RBI's Monetary Policy Committee is likely to lower interest rates in February with a 25-bps repo rate cut, Gudwani noted. "We see it (RBI) gradually departing from a fixation on a point-in-time target for 4% CPI inflation to embracing the 2-6% range as monetary policy evolves in FY26 and see a total of 100 bps of cuts by March 2026," she added.

FISCAL MATH

Barclays expects the government to bring down the fiscal deficit to 4.7% of GDP in FY25, against the 4.9% target set in the Union Budget in July. A bumper RBI surplus transfer and lagging capital expenditure should allow the government to partly offset sluggish growth in corporate tax revenue and a shortfall in divestment proceeds, the report said.

"This paves way for the fiscal deficit to come in below 4.5% of GDP in FY26, in line with the finance minister's commitment." According to the government's medium-term fiscal consolidation roadmap, the fiscal deficit is to lowered to below 4.5% of GDP by FY26.

The government may peg the net market borrowing in FY26 at INR 10.5 trillion, lower than the INR 11.63 trillion budgeted for FY25, Barclays said. "This assumes a nominal GDP growth rate of 10.5% year-on-year, and funding 66% of the fiscal deficit via market borrowings."

The gross market borrowing could be pegged close to INR 14.7 trillion in FY26, higher than INR 14.01 trillion budgeted for FY25, Gudwani said. "If we assume 69% of the fiscal deficit will be funded via market borrowings as seen in FY25, then gross borrowings could be closer to INR 15.1 trillion."  

Barclays projects the current account deficit to moderate slightly to 1% of GDP from 1.1% of GDP estimated for FY25. It also sees a small balance of payments surplus of $8 billion in FY25. The projected FY26 current account deficit of $40 billion should be comfortably financed by a healthy capital account surplus and yield a larger balance of payments surplus of $25 billion, Barclays said.

"Continued tensions in the Middle East, uncertainty surrounding global commodity prices and Trump 2.0 will likely dominate the volatility narrative globally, posing risks to our forecasts."  End

US$1 = INR 85.85

Reported by Shubham Rana

Edited by Avishek Dutta

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