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Policy Support Lifts Domestic Demand Outlook Amid Increased External Headwinds

  • 29 Sep 2025
  • Post Views: 28

The US Federal Reserve cut its policy rate by 25 bps in September and signalled further reductions later in 2025, citing labour market softness. India’s economic growth accelerated to 7.8% YoY in Q1-FY26, a five-quarter high, supported by a favourable deflator and front-loaded government spending. Early Q2 indicators point to sustained momentum across industry, consumption, and services. The GST Council’s reform signals a stronger policy focus on reviving private consumption. Considering this and better-than-expected Q1 growth, we revise our FY26 GDP forecast to 6.8% (from 6.2%). Meanwhile, CPI inflation projection for FY26 is lowered to 2.5% (from 2.8%) owing to GST rate cuts. However, external headwinds from US trade policies, alongside narrowing fiscal space from tax reductions, remain key risks. With a favourable inflation outlook, we expect the RBI to cut the policy rate by 25 bps in Q3-FY26 to nurture consumption recovery. The policy repo rate cut in the October meeting is a close call, with some possibility of it being delayed, with a dovish tone, until December.