India’s real GDP rose by a surprising 7.8% in Q1 FY26, a five-quarter high. This growth was driven by front-loaded government spending and a recovery in private consumption, even as the external sector acted as a drag. A key factor boosting real growth was a lower deflator. On the production side, economic growth was led by an acceleration in services, recovery in manufacturing, and a healthy agriculture sector.

While this strong start offers some upside to our full-year real GDP forecast of 6.2%, the outlook is tempered by external headwinds including the imposition of 50% US tariff on India.

A positive Q1 surprise does reduce the possibility of a policy rate cut in Q3 FY26; however, it is still not off the table given the escalated external headwinds. In the near-term, we could see targeted support from the RBI/Government for the sectors adversely impacted by the US tariffs.