India’s growth momentum remains strong despite mitigating indicators: Fitch Ratings’ Alex Muscatelli

The Indian economy remains on solid footing even as some high-frequency indicators have weakened, said Alex Muscatelli, director of the Economics Group at Fitch Ratings. Speaking to ET Now, Muscatelli said Fitch has raised India’s FY26 GDP growth forecast to 7.4% from 6.9%, reflecting both a stronger-than-expected Q2 print and continued underlying momentum.Fitch expects India’s real GDP growth to remain above trend over the next two years, although it will moderate slightly as base effects fade and inflation normalizes.

Growth momentum intact despite diverging signals

Muscatelli said the GDP growth of 8.2% in the second quarter of FY26 is not only driven by one-off events. “There is clear momentum in growth that should continue, even if at a slightly slower pace,” he noted.However, subdued consumer inflation and a historically low GDP deflator are temporarily narrowing the gap between real and nominal GDP – something that Fitch expects to gradually normalize.

Reforms to enhance India’s long-term growth potential

Fitch currently estimates India’s trend growth at 6.4% per year, but recent structural reforms could push this further.

Muscatelli emphasizes:

• GST reforms, which have improved efficiency and compliance
• New labor laws have recently been introduced to increase productivity, simplify compliance and improve the business environment

“These reforms certainly pose an upside risk to our long-term growth assessment,” he said.

Why growth is expected to slow to 6.2% in FY28

Fitch forecasts real GDP growth to moderate to 6.2% in FY28 due to:

A recovery in inflation in the second half of FY27, which could put pressure on real incomes through:

• Weakening of consumer spending growth
• Fading base effects currently supporting growth
• A gradual recalibration from robust public capital investment to private investment is increasing

Still, capital investment in the private sector is expected to increase as financial conditions ease and business confidence remains optimistic.

Business investment: cyclical pause, not structural weakness

Responding to concerns about moderation in business investment, Muscatelli said global uncertainties are weighing on investment decisions.

However, he believes the backdrop remains supportive with:

• 100 basis points of cumulative RBI rate cuts have already been achieved
• Liquidity support measures, including reduction of the CRR
• Real interest rates are expected to soften once inflation increases

“This combination should support private investment,” he said.

The RBI may deliver another rate cut, but that is the end of the cycle

Fitch expects the Monetary Policy Committee to cut the repo rate to 5.25% in the upcoming policy.

But Muscatelli was clear: “This will be the bottom of the RBI’s austerity cycle.”

Despite strong second-quarter GDP figures, low inflation gives the RBI plenty of room to ease again. However, with core inflation likely to rise gradually and real activity remaining high, further cuts are unlikely.

The liquidity outlook remains supportive

The RBI’s liquidity injection via a cut in CRR signals a easing of intent, which is in line with Fitch’s view of a permanent cut.

“The RBI clearly wants to ensure sufficient liquidity while supporting growth,” Muscatelli said.

Fitch sees India dealing resiliently with global uncertainties, supported by:

• Strong domestic demand
• Structural reforms
• Improving the investment climate
• Liquidity-supporting monetary policy

Although growth may slow from current highs, India remains one of the fastest growing major economies in the world.