India's Outlook 2025-2026 Story

The Indian economy has been in a Goldilocks phase since FY22 with strong growth and manageable macro stability risks. However, our UBS India Composite Economic Indicator (UBS India-CEI), a leading indicator with 15 high-frequency data points, points to recovering economic momentum in October after a weak September quarter.

On a seasonally adjusted sequential basis, CEI was up 0.5% MoM in October vs. an average of +0.2% in the previous quarter. Looking at high-frequency indicators, retail passenger car sales and 2W sales were up 4% YoY and 14% YoY, respectively, in October, led by festive season demand. GST collection picked up (8% MoM) in October after moderating to an eight-month low in September. Industrial indicators, including E-way bill generation (7.5% MoM), electricity generation (4.2% MoM) and steel production (4% MoM), improved sequentially in October. Goods exports were up 17% YoY in October. The services sector continued to show signs of peaking. While services PMI remained in expansionary territory, sequential bank credit growth decelerated further to 11.5% YoY in October (vs. 13% YoY in the previous month), primarily driven by relatively slower credit growth in the services sector (NBFCs and retail trade) and the personal loan (ex. housing) segment.

We believe India's growth could be affected by trade tariffs from various channels including: 1) slowdown in global growth due to lower US and China growth; 2) a further delay in India's private corporate capex recovery due to the risk of China offloading excess capacity in the manufacturing sector; and 3) greater depreciation pressure on China's RMB having implications for India's net goods trade balance. However, we believe global policy shifts could offer new opportunities and strengthen the case for 'China + 1' supply chain shifts to India in the medium term.

Amid rising global uncertainties, we expect India's macro stability risks to remain largely contained in FY26 with 1) headline inflation to decelerate towards 4-4.5% YoY; 2) aggregate fiscal deficit to narrow further to 7.4% of GDP; and 3) current account deficit to remain contained (well below 2% of GDP) despite concerns of regional trade slowdown. We see scope for 75bp of monetary easing in this cycle from early CY25, building in slower domestic growth and lower global rates. Our UBS EM rates strategist forecasts year-end 10-year IGB yields at 6.25% in FY26 (vs. 6.5% in FY25 UBSe). We think USDINR will not be immune to trade tension-driven USD strength (vs. EM peers) and expect year-end INR to reach 87.0 by FY26E (vs. 84.5 in FY25 UBSe).

We expect India to be able maintain potential real GDP growth of 6.5% YoY over FY26-28E, making it world's third- largest consumer market in 2026E and third-largest economy by 2027E (after US and China). We expect India's nominal GDP to increase from cUS$4trn in FY25E to US$6trn-plus by FY30E. We believe India's potential growth could benefit from manufacturing and export push, increased services exports, and digitalisation, leading to improvement in productivity and efficiency gains. However, challenges remain, including the provision of productive jobs for the rising working-age population, a less friendly external environment and the automation overhang.