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Executive Summary:

Real GDP shows sharp recovery in Q1FY26 to grow by 7.8% y/y

India’s real GDP picked pace to grow 7.8% in Q1FY26 compared with 6.5% for same quarter last year. The number significantly exceeded street expectations of ~6.8-7% growth and is partially helped by lower GDP deflator also. Private consumption growth is gaining traction with growth of 7% in Q1. Rural consumption remains resilient and urban consumption would gain traction in coming quarters. Growth in GFCE sharply increased to 7.4% from negative growth quarter last year, indicating low base effect and possibly front loading of fiscal support to the economy. Nominal GDP for the quarter grew by 8.8%

Capital formation growth is in-line with GDP growth

Real Gross Fixed Capital Formation (GFCF) increased by 7.8% y/y in Q1FY26. Despite private capex remains in selective sectors amid trade and tariff uncertainty, the GFCF growth has surprised, helped by government capex and buoyant construction activity. The share of GFCF in GDP appears to be peaking in real terms.

Pickup in agriculture, manufacturing and services growth boost GVA growth

Real GVA also witnessed a growth of 7.6% in Q1FY26. Services GVA grew by 9.3% in Q1FY26, a healthy pace supported by continued strength in both public admin, defence and other services, and financial services, despite both having a strong base. Secondary sector growth surprised positively despite muted electricity growth. Construction, continued to grow handsomely (at 7.6%) despite being on a high base of the past three years. Even as the share of agriculture in GVA continues to decline secularly, it posted a decent 3.7% helped by excellent food crop production.

Stable CAD amidst volatile exports and flows

While the additional 25% tariff could temporarily weigh on exports, our base case assumes a resolution in the coming months, with the existing 25% tariff regime persisting. In the interim, subdued commodity prices, ample forex reserves, and prudent external account management should continue to anchor balance of payments stability. With global headwinds intensifying, foreign flows—both FDI and FII—have stayed muted through 2025, a trend we are watching with keen interest

India ready to be the fastest growing major economy for yet another year in FY26

FY26 could see PFCE rise helped by a much-needed tax break given to the middle class through income tax and upcoming GST rate rationalization. Rural prosperity would be helped by an above-normal rainfall. With inflation remaining under control, the RBI’s monetary stance has created room to sustain liquidity support. This stance must continue to be leveraged to meet investment demand, while ensuring financial stability remains intact

Some haziness on the horizon from global factors likely to curb FY26 growth below FY25 level

Since the last GDP release, trade tariffs have edged higher, and private and foreign investment remains subdued. While domestic demand drivers appear sound, global headwinds loom large. Uncertainty over tariffs continues to unsettle labour intensive sectors besides continued weak hiring activity in IT sector. Nevertheless, we maintain our real GDP growth in FY26 at 6.2% y/y. Nominal GDP will remain challenged in FY26 as inflation sinks, and we expect ~8.5% y/y figure to register.

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