Stability on the Horizon?

Executive Summary After defeating the TMC, the BJP now runs a contiguous political bloc from the Gangetic plain through Bengal and Assam.

The TVK's debut win in Tamil Nadu ended the DMK-AIADMK duopoly and the DMK exited the INDIA alliance.

Parliament passed bill easing IBC rules and decriminalising regulatory non-compliance, but bills on delimitation and women's reservations failed, with another push expected in the Monsoon Session.

India signed an FTA with New Zealand and elevated several European and Gulf partnerships, alongside renewed progress with the US on critical minerals, defence and a possible trade deal.

GDP grew 7.7% last year but is expected to slow to around 6.5% this year due to a weak monsoon, high energy prices and a tough external environment

While services and manufacturing grew strongly, agricultural growth was tepid, and is likely to slow further this year.

IMA's BCPI index fell to its lowest level since the 2020 lockdowns, even as credit growth, auto sales and GST collections have remained strong.

Investment grew at its fastest pace in years in FY26, driven by public capex, while private investment stayed subdued due to low capacity utilisation.

Retail inflation remains manageable but the RBI has raised its FY27 forecast sharply, while wholesale inflation hit a 42-month high in April.

The trade deficit widened to $333 billion as merchandise exports stagnated, though services exports helped deliver a rare current account surplus in Q4.

Heavy FPI outflows pushed India's BoP position into the negative and drove the rupee to a record low of below 97/$, but the currency has since stabilised.

. Politics & Policy: A Near-Term Review . BJP completes its eastern arc; opposition fractures further

State elections in April-May saw the BJP end 15 years of TMC rule in West Bengal with a landslide win, and return for a third successive term in Assam. Combined with Bihar, where Samrath Chaudhary was sworn in as CM earlier this year, the BJP now controls a contiguous bloc stretching from the Gangetic plain to the Bay of Bengal. However, this is a double-edged sword and the BJP will need to work hard to prove how it is ‘different’ from what came before it. As a result, the region, which has historically lagged the rest of India, could see the creation of meaningful new business opportunities over the next 18-24 months.

In Tamil Nadu, actor Vijay's TVK won 108 seats in a debut election, ending the DMK-AIADMK duopoly that had defined state politics since 1967, and formed a coalition government with Congress and Left support. Kerala returned to the Congress-led UDF.

The political aftershock in West Bengal has been severe. In the weeks following their party’s defeat, nearly 100 TMC councillors resigned from municipal bodies, its MPs are seeking to break away, and its senior leaders have begun voicing open dissent. An outright split remains a distinct possibility.

A clear takeaway from these results is that even dominant regional parties must continuously reinvent themselves if they are to stay relevant. For the long-embattled INDIA grouping, the defeat of key parties like the TMC and DMK represents a severe body blow, and one from which it may not recover. The DMK, for instance, has formally exited the group, citing the INC’s decision to back the TVK in Tamil Nadu. This suggests that, going forward, opposition tie-ups could be regional rather than national in nature. However, a small measure of relief came from the AAP's sweep of Punjab's civic body elections. Winning nearly half of all municipal wards, it secured a vital confidence-booster ahead of next year’s Assembly elections, a contest it cannot afford to lose without raising serious questions about its long-term viability.

. Reform delivered and deferred

Parliament’s Budget Session concluded in late April with the passage of three key reform-oriented bills. Amendments to the IBC (Insolvency and Bankruptcy Code) reduce uncertainty in insolvency proceedings by removing the mandatory CCI pre-approval requirement for resolution plans, and closes a procedural gap that had created uncertainty around resolution timelines for creditors and acquirers alike. Another bill decriminalised regulatory non-compliance, reducing litigation and penalty exposure across sectors. Finally, changes to the Industrial Relations Code will advance labour law consolidation.

What most clearly stood out from the session, though, was the failure of three linked bills on parliamentary expansion, delimitation and women's reservations. The bills fell well short of the required two-thirds majority, demonstrating how the opposition can find unity of purpose when the stakes are direct enough.

The Monsoon Session, starting in late July, will be defined by whether the government can revive its efforts in this direction. It is working to close a ~54-vote gap by leveraging a fractured opposition. (The TMC's post-Bengal collapse and the DMK's exit from the INDIA alliance create potential space for defections.) Meanwhile, a JPC examining the One Nation One Election bills is required to submit its report by the Monsoon Session, making legislation to bring in simultaneous polls a minor but distinct possibility alongside delimitation.

. Bilateral deals mark India's crisis-era trade pivot

India’s trade and diplomatic outreach has been in overdrive lately. A CEPA with Oman has just come into force. Besides providing duty-free access to over 98% of the bilateral trade and improving professional mobility opportunities, the deal aimed to serve as a geostrategic hedge. India also signed an FTA with New Zealand in April, providing duty-free access to 100% and 95% of India and New Zealand's bilateral exports, respectively, and committing New Zealand to $20 bn of investments over 15 years. More recently, PM Modi's UAE and Europe tour, covering the Netherlands, Sweden, Norway and Italy, resulted in the upgradation of most of these relationships to ‘strategic partnership’ (or in Italy’s case, ‘special strategic partnership’), with a host of sector-level deals, including in defence, semiconductors and critical minerals. The to-be-ratified EU FTA will likely get a boost from Mr Modi's recent visit to France for a G7 summit.

Most crucially, efforts are fully underway to repair a frayed US relationship. US Secretary of State Marco Rubio’s visit in May resulted in a critical minerals framework, renewed defence cooperation under a ten-year framework, progress under the TRUST technology partnership and a Quad ministerial meeting covering maritime surveillance, Indo-Pacific energy security and supply chain resilience. Mr Rubio also secured an Indian pledge to purchase $500 bn in US goods over 5 years. A meeting on the sidelines of the G7 between Mr Modi and and Mr Trump – the first since early 2025 – should add momentum to the on-again-off-again trade deal. However, Commerce Minister Piyush Goyal has indicated that the first tranche of a deal is on track for conclusion by mid-July. The remaining sticking points are agriculture, GMO crops and digital trade rules, with the US pushing India to address data localisation requirements and barriers to digital platform access, commitments that would have direct implications for India's technology and financial services sectors.

Still, the relationship remains shaky. The Trump administration has parallelly launched investigations into unfair trade practices against several countries including India while maintaining a blanket 10% tariff and the USTR's proposed 12.5% additional duties citing inadequate enforcement of forced-labour restrictions. This creates downstream exposure for Indian exporters in textiles, apparel and manufacturing. While the relationship seems to be moving in the right direction, each round of diplomatic progress continues to be shadowed by a new tariff mechanism.

Lastly, India's Chabahar investment, a decade-long bet on a Central Asia corridor bypassing Pakistan and countering China’s BRI, has been effectively suspended after the US sanctions waiver expired in April with no renewal. New Delhi's strategic autonomy posture is thus being tested on multiple fronts, and the costs of that ambiguity continue to accumulate.

. A Macroeconomic Review . The Indian economy grew by 7.8% in Q4 (Jan-Mar), taking full-year growth to 7.7%, marginally above the government's earlier estimate of 7.6%. This was made possible by a robust services sector, strong manufacturing growth and the construction sector lending steady support. Looking ahead, GDP growth is expected to moderate to ~6.5% this year as high energy prices, a weak monsoon, supply chain disruptions, inflationary pressures and a general sense of economic uncertainty impact both spending and investment.

. Agriculture: Favourable harvest, uncertain monsoon ahead

Agricultural output expanded by 3% last year, slightly above earlier projections, supported by a favourable rabi (winter) harvest. However, growth is likely to drop to ~2.5% in FY27, mainly because of a poor monsoon. The IMD has revised its seasonal rainfall forecast down to 90% of the Long Period Average, potentially the lowest in a decade. The Iran war, meanwhile, has caused a spike in fertiliser prices and dried up supplies, prompting the government to double its subsidy allocation for the year, to Rs 3.5 tr. Government efforts to secure fertiliser supplies through diversified sourcing and buffer management should, though, help contain the impact. Weaker agricultural growth, in turn, will impact rural consumption spending.

. Fading manufacturing momentum

The secondary sector – mainly manufacturing, which grew by 10.7% – was strongly growth supportive last year. However, the momentum softened towards the year-end as global trade tensions and the conflict in West Asia weighed on export-oriented industries and pushed up freight and input costs. Construction activity remained supported by ongoing public infrastructure spending and private real-estate demand, allowing the sector to maintain growth broadly in line with the previous year. This year, industrial growth is likely to slow to 6.5-7%. While domestic demand and infrastructure spending should remain supportive, the Iran fallout will weigh on supply chains, energy costs and exports even months after any conclusion to the conflict.

. Services have been robust but face headwinds

Services outperformed in FY26, expanding by 9.3%, up from 7.9% the previous year. Excluding the slower-growing (~5%) public administration, defence and other services group – a proxy for public spending – the sector grew by a considerably-faster 10.6%. This year, while sustained services exports through the GCC route should provide support, overall growth is likely to moderate to the 8-8.5% range.

. Macroeconomic indicators: Strong data, cautious sentiment

. India's key macroeconomic indicators remained broadly positive through FY26. While only limited data for FY27 is available, the early readings suggest that economic activity has remained resilient. GST e-Way bill issuances continue to rise, reflecting sales momentum as well as rising formalisation in the economy. Meanwhile, GST collections touched a new record (Rs 2.43 tr in April). The Purchasing Managers' Index (PMI) for Manufacturing, while staying solidly in the black, is now consistently several points below its mid-2025 level of 57-59. Similarly, the Services PMI has broadly maintained its upward thrust and touched a 6-month high of 58.8 in May. On the other hand, IMA's Business Confidence and Performance Index (BCPI) fell sharply to 53.3 in April, its lowest level since the aftermath of the March 2020 lockdowns. The decline was broad-based, with profitability, sales, new orders and capacity utilisation all weakening, suggesting a degree of caution among businesses despite generally favourable macroeconomic conditions.

. Non-food credit growth sped up in the second half of FY26, from 9.3% in June 2025 to 16%+ levels currently. The improvement was broad-based, with credit to industry rebounding from 5.9% to 16.5%. Personal loan growth also continued to strengthen. While the headline numbers remain below the peaks recorded in 2023, the recent pick-up suggests a recovery in both business and consumer borrowing. Automotive demand strengthened across all major segments in FY26, with passenger vehicle sales growing by 14%, commercial vehicles by 12.3% and 2-wheeler by 13.1%. The September GST cuts provided an additional boost by lowering the effective tax burden on several mass-market vehicle categories, improving affordability and supporting demand.

. Investment momentum is up

Investment activity was another lever of growth last year. Gross Fixed Capital Formation (GFCF), a measure of economy-wide investment, grew by 8.2%, its highest in several years, and well above the pre-pandemic average. Public investment remained did much of the heavy lifting, as it has for several years, with most government capex being front-loaded to the first three quarters of the fiscal year. Conversely, with capacity utilisation rates failing to break through the crucial 80% mark, beyond which private investment tends to accelerate, private capex remains relatively subdued.

. Consumption has held firm, but for how long?

Private Final Consumption Expenditure (PFCE), which broadly tracks household spending, accelerated to 7.7%, from 5.8% in the previous two years. The recovery was supported by a broad-based improvement in consumer demand, reflected in double-digit growth in passenger vehicle registrations in both Q4 (Jan-Mar) and the year as a whole. FMCG sales also remained healthy, with Nielsen reporting full-year growth of 9.2%, driven by a combination of higher consumption and price-led gains. Rural demand continued to outperform urban markets, supported by direct benefit transfers, the growing contribution of non-farm income sources and a favourable agricultural backdrop. (Tractor sales, indicatively, had a record year, growing by 23.5%, as above-normal monsoons boosted agricultural output and strengthened rural cash flows.) The September GST rate cuts provided an additional tailwind, although initial supply-chain disruptions delayed some of the expected benefits. Looking ahead, a weak monsoon (which will hit rural demand), choppy financial markets (which will dampen big-ticket spending via a negative wealth effect), rising inflation and general economic uncertainty will likely cause consumption to moderate.

. Renewed concerns around inflation

Inflationary pressures have reared their head after a long gap. Retail (CPI) inflation is currently in a manageable 3.5% range, but the RBI's Monetary Policy Committee (MPC) has raised its FY27 CPI inflation forecast to 5.1%, up from the 4.6% projected in April, peaking at ~5.9% in Q3 (Oct-Dec). The upward revision reflects mounting concerns around the conflict in West Asia, elevated fuel prices, supply-chain disruptions and weather-related risks. At its June meeting, the MPC kept the policy repo rate unchanged at 5.25% and retained a neutral stance, giving it the option to move in either direction, depending on how external factors play out in the coming months. Meanwhile, wholesale price (WPI) inflation surged to a 42-month-high of 8.3% in April, as spiking energy and other commodity prices fed through. The sharp divergence between wholesale and consumer inflation suggests that pass-through pressures are building and could drive up retail prices over the coming months. If inflation evolves broadly in line with the RBI's projections, and especially if the US Fed starts to tighten, rate hikes could re-enter the discussions in subsequent MPC meetings.

. Oil prices have moderated but remain a source of risk

External risks have eased somewhat following signs of a de-escalation in West Asia but remain stark. The price of India's crude oil basket jumped from ~$63/barrel in January to $146 at its peak in March, one of the steepest increases ever. Prices have since moderated, falling below $100 on reports of a potential US-Iran agreement and the possible reopening of the Strait of Hormuz. Despite multiple retail price hikes through May, oil marketing companies continue to incur significant losses on the sale of petrol, diesel and LPG, with under-recoveries on household cooking gas remaining particularly large. However, the rupee's depreciation is offsetting a portion of the gains from easing dollar-denominated crude prices and limiting how much of this translates into domestic price relief.

. Services exports – making up for merchandise-side weakness...

Last year, merchandise exports grew by just 1%, with non-oil export growth at 3.6% (down from 6.1% the previous year). Overall imports rose by 7.3% whereas non-oil imports climbed more sharply (12.5%, from 7.9% the previous year), reflecting strong domestic demand. As a result, the trade deficit widened from $283 bn to $333 bn year on year. However, with services exports growing by 8.7% (compared to just 3% growth in services imports), the pressure on India's BoP position was limited. With inward remittances also rising, India recorded a rare current account surplus of $7.1 bn, or 0.7% of GDP, in Q4, reversing big deficits in Q2 and Q3 and Q2.

For FY26 as a whole, the current account deficit (CAD) was $25.2 bn, unchanged as a share of GDP at 0.6%. However, given elevated oil and other commodity prices, it is likely to widen to 1.5-2% of GDP in the current fiscal. Even as exports are off to a strong footing, recording double-digit growth in both April and May, this is unlikely to sustain. The IMF projects world trade volume growth (goods plus services) to slow to 2.8% this year, from 5.1% in 2025, before recovering to 3.8% in 2027. The slowdown reflects a combination of front-loading that pulled forward demand into 2025, the impact of tariff hikes and the recent, war-related disruption to trade routes. Both advanced and emerging economies are projected to see slowing trade flows, though the services side will be remain more resilient than the goods trade, supported by continued growth in digitally delivered services. For India, this will only partly offset the serious pressures facing the merchandise trade.

. The other, equally worrying part of the story is India’s capital account. Despite a testing environment, gross FDI flows amounted to $94.5 bn last year, a ~17% YoY increase. However, factoring in outbound FDI by Indian firms, net inflows came to just $7.65 bn, though better than the previous year’s negligible $0.96 bn. At the same time, foreign portfolio investment (FPI) have been massively net-negative, totalling to $16.6 bn in FY26 and a further $15.4 bn in just the first ~2.5 months of FY27. Plainly, investors have shifted toward the safety of the US dollar and are unlikely to change course before certain key external risks are addressed. Resultantly, India’s capital account – which has long been in surplus, more than balancing the CAD – has fallen deeply into the red. This bodes poorly for India’s overall balance of payments (BoP) position, which turned sharply net-negative last year – (-)$30.8 bn, compared to $5 bn in FY25.

. External pressures – weighing on the rupee

This confluence of a widening trade deficit and capital outflows has put steep downward pressure on the rupee. The currency touched a record low of ~97/$ in May on the back of a surging import bill and sustained FPI sales. In response, the RBI intervened to support the rupee and ease pressure in currency markets. As part of these efforts, it conducted a $5 bn dollar-rupee swap auction, which attracted nearly $9.8 bn in bids, indicating strong demand despite heightened market volatility. India's foreign exchange reserves, meanwhile, fell to ~$681 bn in late May, partly reflecting RBI intervention and valuation effects. While softening crude prices have since provided some relief, persistent geopolitical uncertainty, capital outflows and imported inflation risks are likely to keep the rupee under pressure in the near term.