India’s economy is likely to lose some momentum through the rest of FY26 as the government tightens expenditure to meet its fiscal deficit target and global trade conditions soften, according to Leif Eskesen, Chief Economist at CLSA. The brokerage expects full-year GDP growth to come in at 6.9%, just shy of the 7% mark.Eskesen said the modest slowdown will largely stem from two factors. “One is that the government has to rein in spending to some extent to meet the deficit target. We think there will be some slowdown on that side, maybe in government-led infrastructure-type investments,” he noted.The second drag will emerge from external conditions. India continues to feel the lagged impact of the higher tariffs imposed by the United States, even as the outlook for global trade remains weak over the coming quarters. This combination, Eskesen said, is likely to temper the pace of expansion relative to the strong first quarter.
However, the CLSA economist stressed that the slowdown is not expected to be significant. He pointed out that the recent GST reforms could lend support to consumption as the fiscal year progresses. “If we start to see the effect of some of the GST reforms, that could provide a bit of a lift to consumption,” he said, suggesting that domestic demand may cushion the economy against external pressures.Despite the moderation, Eskesen maintained that India’s underlying growth trajectory remains intact, with the economy still on course to deliver one of the strongest growth performances among major economies in FY26.
On market flows, Eskesen warned that India may not be able to sidestep the impact of a potential correction in the United States. He described US equities as “frothy—and a little bubbly,” adding that a correction there would dampen risk appetite globally.“It will be hard for Indian equities to duck the trend in that environment,” he said.Foreign investor positioning also remains constrained by India’s high valuations and stretched domestic positioning. While he expects equity inflows to eventually resume, Eskesen believes a “healthy correction” may be necessary before foreign funds begin allocating meaningfully again.He added that if the GST reform boosts growth and corporate earnings hold up well after any correction, conditions could become more favourable for renewed foreign flows.On monetary policy, Eskesen expects the Reserve Bank of India to cut rates by 25 basis points in December, followed by another 25-basis-point cut in the subsequent policy meeting. He dismissed the possibility of a larger move, despite recent inflation data prompting speculation.“If you look at core inflation in India, it is still around the target. So, I do not think there is a case for cutting by 50,” he said.Watch accompanying video for entire conversation.
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