Morgan Stanley Raises India’s GDP Growth Projection to 6.2% for FY26 – Key Justifications Explained
India’s Growth Outlook Remains Positive
The growth trajectory of India is projected to remain robust, fueled by strong domestic demand and favorable government policies, even amid global uncertainties. Morgan Stanley has updated its GDP growth forecast for India, estimating it to be 6.2% for FY26, supported by steady inflation rates, ongoing monetary easing, and a rise in both public and household investment.
Resilience Amid Global Challenges
Despite external challenges, India’s economy is expected to exhibit resilience, backed by robust domestic consumption and investment. According to Morgan Stanley, a sustained recovery in consumption and investment—especially in public and household sectors—will drive this momentum. The firm anticipates that supportive policies will continue, particularly with a focus on easing monetary policy while fiscal measures emphasize capital expenditures (capex). Maintaining macroeconomic stability with favorable inflation projections will further enable the Indian economy to capitalize on its internal strengths and proactive policies.
India’s Growth Cycle: A Gradual Recovery
India’s growth cycle has shown gradual recovery following a partially policy-induced slowdown in the latter half of the calendar year 2024. Upasana Chachra, Chief India Economist at Morgan Stanley, remarked, “We have slightly revised our growth forecasts upward to 6.2% year-on-year (from 6.1%) for FY26 and 6.5% year-on-year (from 6.3%) for FY27 due to the easing of US-China trade tensions, which enhances the outlook for external demand.”
Consumption Recovery: A Key Growth Driver
While lingering external uncertainties may pose risks, Morgan Stanley indicates that domestic consumption will be the primary driver of India’s growth. A broader-based recovery in consumption is anticipated as urban demand improves and rural consumption remains strong. With consumption representing approximately 60% of GDP, it serves as the backbone of India’s domestic demand narrative. The firm noted that private consumption growth increased to 6.7% year-on-year in the December 2024 quarter, up from 4.5% in the previous year, and is projected to remain well-supported in the near term.
Urban and Rural Dynamics
Although urban consumer demand has recently slowed due to reduced corporate earnings affecting wage growth—dropping to 4.3% in the December quarter from 13.3% a year prior—there is an optimistic outlook for recovery. It is expected that a resurgence in corporate earnings will eventually boost employee wages, albeit in the coming 2–3 quarters. Furthermore, anticipated shifts in monetary policy and the loosening of RBI regulations should facilitate greater access to capital, particularly benefiting retail credit growth. In contrast, rural consumption has shown considerable resilience, bolstered by a strong southwest monsoon that benefited crops in 2024, with predictions of an above-normal monsoon in 2025 likely to support the upcoming harvest.
Investment Trends: Public and Household Leading
Within the investment sector, Morgan Stanley forecasts that growth will predominantly stem from public and household capex, while private corporate capex is expected to recover gradually. The central government plans to allocate Rs 11.2 trillion for capital projects in FY26, maintaining capital expenditure levels at 3.1% of GDP, consistent with FY25. Total effective capital spending, combining central allocations and state grants for infrastructure, is anticipated to hit a record 4.3% of GDP in FY26, marking a year-on-year growth of approximately 17%. Additionally, Rs 1.5 trillion is earmarked as 50-year interest-free loans to aid state governments.
Trade: Addressing Tariff Challenges
Recent developments have indicated a faster and more comprehensive de-escalation of US-China trade tensions, positively impacting global growth and trade prospects. According to Upasana Chachra, “The lessons from the 2018-19 trade conflicts highlight the adverse effects on India’s growth cycle. In 2019, India’s total exports fell by 0.2% year-on-year, contrasting with a vibrant 13% growth in 2017.” The effects were similarly detrimental for capital goods imports, which contracted by 3.2% year-on-year in 2019, as did industrial production growth.
Macro Stability and Inflation Outlook
Current inflation rates are trending lower than anticipated, mainly due to declining food prices influenced by seasonal patterns and improved agricultural output, as food constitutes a significant portion (45.9%) of the Consumer Price Index (CPI). With an expected above-normal monsoon in 2025, food prices are likely to remain stable. Core inflation has shown slight upward movement but remains manageable, with a low probability of a sharp rise, aided by favorable global commodity pricing. At present, headline inflation for 2025 has averaged 3.6%, with food inflation at 3.5% and core CPI at 4.1%. The RBI’s latest household inflation expectations survey reflects a decline in expectations to their lowest since May 2020.
Current Account Dynamics
The current account deficit is projected to be influenced by higher tariffs on US exports, diminished demand due to slower global growth, and reduced global commodity prices. The report suggests that the current account deficit will likely stabilize around ~0.7% of GDP during FY26-27, remaining well within the comfort zone of policymakers, supported by robust macroeconomic buffers.
Supportive Policy Stance
Morgan Stanley anticipates continued monetary policy support as a primary mechanism to address concerns regarding domestic growth while maintaining a favorable inflation outlook. “We expect the RBI to enact an additional 50 basis points rate cut, resulting in a total easing of 100 basis points, setting a terminal repo rate of 5.5%. Risks may lean towards further cuts if growth concerns intensify due to a potential US recession, although this is not currently our base case,” Upasana Chachra concluded.
