CareEdge Ratings has revised India's GDP growth forecast for FY26 upwards to 7.5% from the earlier projection of 6.9%. This adjustment reflects the economy's unexpectedly strong performance in the first half of the fiscal year.

The agency had initially estimated a 6.6% GDP growth for Q1 FY26, but the actual figure surpassed expectations, reaching 7.8%. This upside was largely driven by a significant rebound in the manufacturing sector and sustained momentum across various services, particularly in financial, real estate, professional services, public administration, and defense. Q2 FY26 also saw impressive growth, with GDP expanding by 8.2%. This robust growth was supported by income tax rate reductions, GST rationalization, front-loading of goods exports, continued momentum in services exports, and easing inflationary pressures.

Despite the strong first half, CareEdge anticipates a moderation in economic activity during the second half of FY26. The agency projects growth to moderate to approximately 7% as the impact of front-loading of exports diminishes and consumption demand normalizes after the festive season. Additionally, the low base effect from the previous year will wane, and the deflator is expected to increase from its current low levels by the fourth quarter of FY26. External economic risks may also contribute to this moderation. CareEdge expects GDP growth to moderate to 6.3% in the second half of FY26.

Several factors contributed to the economy's strong performance in the first half of FY26. Private final consumption expenditure (PFCE) accelerated to 7.9% in Q2, supported by income tax cuts, GST rationalization, an early festive season, and easing inflation. Gross fixed capital formation also grew at a healthy rate of 7.3% in Q2, driven by public capital expenditure. The agricultural sector also performed well, with a 3.5% growth in Q2, supported by a good monsoon and government spending on agriculture and allied sectors.

CareEdge Ratings also expects the rupee to trade between 89-90 against the dollar in FY27. While global deflationary trends have created monetary space for rate cuts in most advanced and emerging economies, external economic uncertainties remain a key concern. These include China's excess capacity and the potential redirection of its exports to India. However, the rationalization of income tax rates, GST cuts, healthy rural activity, easing prices, and potential rate cuts by the Reserve Bank of India are expected to support domestic growth throughout FY26.