India's GDP growth likely to stay strong in Q2FY26, say economists

Economists say the effect of a low deflator and low base is likely to boost expansion

With India’s gross domestic product (GDP) growth accelerating to a five-quarter high of 7.8 per cent in April-June 2025, economists reckon the headline figure will stay strong well into the second quarter. 

This is because the effect of the low deflator and the low base is likely to boost the GDP figure again and the impact of American tariffs is expected to be felt only after September. 

The Reserve Bank of India (RBI) in August had estimated a “slight uptick” in growth in the second quarter (Q2) because it projected the rate to hit 6.7 per cent from its estimate of 6.5 per cent for the first three-month period (Q1) of the financial year. 

Gaura Sengupta, chief economist, IDFC First Bank, said Q2 growth was expected to be relatively strong and more than 7 per cent with support from the base effect and the negative impact of bilateral tariffs not yet fully felt. 

Moreover, growth in the GDP deflator is expected to slow further in Q2FY26, which will further boost real growth rates.  

“Listed companies’ profits, which got support from lower input costs in Q1, will continue to benefit in Q2. Government capital expenditure, which was frontloaded in Q1, could see some moderation in Q2 but it will remain supportive to the capex cycle. Government capex is expected to slow more in H2FY26 as revenue growth gets impacted by subdued tax collection and potential impact of cuts in goods and services tax,” she added. 

Stating similar views, Paras Jasrai, associate director, India Ratings, said the most notable trend from the latest GDP numbers was falling nominal GDP growth, coupled with 23-quarter low inflation rates, which is likely to persist in  the ongoing quarter as well, with a strong base effect as real GDP growth had slipped to 5.4 per cent in Q2FY25. 

 

“There is a possibility that the economy will still see an uptick, which the RBI has factored in. This will very well mean growth going well above 8 per cent in Q2. The wholesale price index is expected to be on a deflationary trajectory with the retail inflation rate also expected to be near the lower tolerance band of the RBI in Q2FY26,” he added.    

Nominal GDP in the June quarter grew at a slower pace of 8.8 per cent compared with the finance ministry’s estimate of 10.1 per cent for FY26 as a whole. The gap reflected a sharp narrowing in the GDP deflator as it stood at 0.9 per cent in Q1FY26 versus 3.4 per cent in Q4FY25.  

In a note, Nomura Asia said a sharp fall in the deflator was exaggerating real growth across sectors (the National Statistics Office does not directly get the data for real economic activities). Across many sectors, real growth accelerated even as nominal growth fell, reflecting the role of low deflators in boosting real growth.   

“Looking ahead, rural consumption indicators are holding up, but urban consumption appears soft. Within the industrial sector, utilities are trailing, in part owing to monsoons, but infrastructure and construction output is holding up, likely due to public capex. Merchandise export growth continued to be strong in August and a slowdown is likely after September. Nevertheless, with the GDP deflator likely to moderate further in Q3, the disconnect between real GDP and high frequency data is likely to continue. Considering the higher starting point, we expect Q2 GDP growth of 7.4 per cent,” it added. 

It further said it was revising the FY26 growth projection to 6.6 per cent from 6 per cent. Beyond September, it expects growth to slow more sharply to 6 per cent in Q3 and 5.6 per cent in Q4, implying an average rate of 5.8 per cent in the second half of FY26 versus 7.6 per cent in the first. 

Looking Ahead

• Impact from US tariffs is expected to be felt only after September 
• GDP deflator growth stood at 0.9% in Q1FY26,against  3.4% in Q4FY25
• It may further slide down in Q2 Nominal GDP in Q1FY26 stood at 8.8%, compared with the
• finance ministry’s estimate of 10.1% for FY26
• Nomura Asia revised India’s FY26 growth forecast to 6.6% from 6% 
• The agency said a sharp fall in the deflator was exaggerating real growth across sectors