India's Economy: Navigating Growth and Inflation in 2026

India's Economic Outlook for 2026

According to Samiran Chakraborty, Chief Economist at Citi India, India's economy is likely to experience a 'Goldilocks' scenario of high growth and low inflation in 2026, similar to 2025. However, this scenario may come with some moderation. Chakraborty expects the combination of over 7% economic growth and under 4% inflation to continue, but with slightly weaker growth and higher inflation in the coming year.

Growth and Inflation Expectations

Chakraborty attributes the potential slowdown in growth to the fading effects of the significant fiscal stimulus and monetary stimulus seen in 2025. On the inflation front, he anticipates a slight uptick due to mean reversion and base effects. However, he does not foresee inflation becoming a concern that would necessitate any policy tightening from the Reserve Bank of India (RBI).

Factors Contributing to Low Inflation

Chakraborty dissects the surprisingly low inflation of 2025, which saw forecasts revised down from 3.8% to 2%. He attributes the 180-basis-point drop primarily to , including:

• Vegetable prices (100 basis points)
• Non-vegetable food prices (40 basis points)
• Core inflation, primarily due to the GST cut (40 basis points)

He expresses caution about whether these 'lucky' circumstances, including benign vegetable prices and deflationary pressures from China, would align again in 2026.

Rupee Depreciation and Balance of Payments

The depreciation of the rupee in 2025, despite strong GDP growth, was a significant anomaly. Chakraborty points out that for the first time since 1991, India is poised to record two consecutive years of a Balance of Payments (BOP) deficit, which has been the primary driver of the currency's weakness. However, he projects a potential turnaround, with the BOP possibly turning into a surplus in the first quarter of 2026.

Bond Market Challenges

A significant macro challenge looms over the bond market. Chakraborty highlights a dramatic increase in government borrowing, with combined central and state bond issuance projected to exceed ₹30 lakh crore in FY27, a threefold increase from pre-COVID levels. This massive supply is expected to exert upward pressure on bond yields by widening the term premium.

To counter this, the RBI's intervention will be crucial. Chakraborty argues that the central bank would need to continue substantial support through Open Market Operations (OMOs) to manage liquidity and prevent rising borrowing costs from undermining its monetary policy objectives.

While the growth-inflation balance remains favourable, managing the fiscal and external accounts will be the key challenge for India in 2026. With the right policies in place, India can navigate its economic challenges and achieve a stable and sustainable growth path.