India’s economic growth is projected to surpass 6.5% in the fiscal year 2025-26 (FY26), an increase from the 6.3% expected in the current fiscal year. This anticipated growth is attributed to heightened government capital expenditure, tax reductions aimed at boosting middle-class consumption, and monetary easing measures.
Following a temporary slowdown in mid-2024, India’s economy is expected to reaccelerate, positioning it among the fastest-growing large economies globally. The Finance Ministry’s Economic Survey forecasts GDP growth for the upcoming fiscal year to be between 6.3% and 6.8%, with official estimates indicating a 6.5% growth for the current fiscal year.
While the operating environment for Indian banks is anticipated to remain favorable, a moderate deterioration in asset quality is expected after recent improvements. This potential stress may affect unsecured retail loans, microfinance loans, and small business loans. Despite this, banks’ profitability is likely to remain adequate, as any declines in net interest margins are expected to be marginal amid modest rate cuts.
A decrease in India’s average inflation rate to 4.5% in FY26 is forecasted, down from 4.8% in the previous year. The Reserve Bank of India (RBI) had previously raised its policy rate by 250 basis points between May 2022 and February 2023 to combat inflation. In February 2025, the RBI reduced its policy rate by 25 basis points to 6.25%. Any further rate cuts will be modest, as the central bank maintains caution amid global uncertainties, including U.S. trade policies and associated market and exchange rate volatility. System-wide loan growth is expected to slow to 11-13% in FY26, down from an average of 17% between March 2022 and March 2024, as banks aim to align loan growth with deposit expansion.