India’s FY26 economic outlook continues to be besieged by worsening external headwinds with imposition of 50% cumulative tariff by the If the elevated level of tariff, one of the highest in the world, stays for an extended period, then the knock-on impact on domestic manufacturing employment in sectors that are most dependent on US demand could become concerning. Expectedly, Indian policymakers have swung into action to mitigate the external risks starting with announcement of a GST restructuring.  We expect more targeted steps to be announced in the near term to provide support to the vulnerable export-oriented sectors.

US tariffs would impart a downside to FY26 GDP growth to the extent of 0.4-0.5% . We estimate GST rationalization to add 0.2-0.3% to FY26 GDP growth. On a net basis, while downside risks still dominate on the margin, the robust Q1 GDP data prompts us to maintain our FY26 GDP growth projection of 6.4%. Inflation remains benign, with CPI undershooting the lower bound of inflation tolerance even as WPI remained in deflation territory for the second consecutive month. Subdued seasonal performance by food prices, retrained MSP hikes, satisfactory progress in rainfall, and a moderately lower global commodity price environment have been key drivers. We maintain our FY26 CPI inflation projection at 3.0%. After facing an abrupt pivot in the monetary policy stance to ‘neutral’ in Jun-25, the bond market sentiment took a further cautious turn post the announcement of GST restructuring by the government. With the tariff uncertainty for India unlikely to see any immediate resolution, we expect announcement of additional policy support measures (Interest rates, liquidity, regulatory, and fiscal) with fiscal risks to get addressed through bumper non-tax revenue collection and potential expenditure rationalization. On a net basis, we fine-tune our 10Y g-sec yield forecast for Mar-26 to 6.30% from 6.20% earlier on account of external risks. espite a soft dollar backdrop, the INR continues to remain weak, while underperforming most of its key peers. The immediate impact of high US tariffs is borne by INR. This is having a dual impact of expanding the merchandise trade deficit while keeping FPI equity investors in selling mode. We maintain our call of moderate depreciation towards 89.50 by Mar-26. A negatively skewed balance of risk for India’s FY26 BoP will be a key determinant of INR trajectory in the coming months.