Slightly slower but India's GDP growth likely stayed strong in Q2

A favourable base effect and low deflator growth which boosted the headline figure in Q1 is likely to have continued in Q2 - though less pronounced

Growth in the Indian economy is expected to have maintained its momentum through the September quarter of 2025-26 (Q2FY26), even as the headline number may have slipped below the five-quarter high of 7.8 per cent recorded in the June quarter, according to economists.

 

A favourable base effect and subdued deflator growth, which lifted the Q1 figure, are thought to have persisted into Q2, though to a lesser extent. The impact of steep 50 per cent American tariffs did not fully materialise in the quarter, while front-loading of exports continued. An above-normal monsoon is also expected to have supported agricultural output and rural demand.

 

Gaura Sengupta, chief economist at IDFC Bank, said the “broad momentum” of the economy had continued into the second quarter, aided by several tailwinds. “In my estimate, it could very well be above 7 per cent,” she said.

 

“Low deflator growth and base effects remained, though less pronounced. The full impact of tariffs will be visible only in subsequent quarters. Listed companies’ profits, supported by lower input costs in Q1, continued to benefit in Q2. Government capital expenditure, though saw some moderation, remained supportive to the capex cycle,” she added.

 

Paras Jasrai, associate director at India Ratings, estimates Q2 growth between 6.5 per cent and 7 per cent, noting that the impact of the Trump era tariffs may have started to filter through, while one-off factors such as low deflator growth faded.

 

“Growth in consumer durables and non-durables slowed in Q2, as shown by the latest industrial production data. Flooding from the monsoon may also have affected crops, particularly perishables. While momentum was sustained, it certainly lost some steam,” Jasrai said. 

 

Echoing that sentiment, Bank of Baroda’s Chief Economist Madan Sabnavis said that while growth momentum persisted, it was “a bit muted” as the economy faced a series of shocks. 

 

Primary among them, he said, was a slowdown in private investment due to uncertainty over US tariffs. “Consumption was deferred because of the announcement of GST rate cuts. The positive impact of those will only be seen in the coming quarters,” Sabnavis added.

 

Aditi Nayar, chief economist at ICRA Ratings, said the pace of economic growth likely moderated in July and August of FY26, as year-on-year prints in most high-frequency indicators eased compared with Q1. Excess rains weighed on some sectors, the GST rationalisation announcement led to deferred discretionary purchases, and the 50 per cent US tariffs hurt exports and production, she said.

 

“In particular, slower growth in government spending in these two months is expected to weigh on the growth print, which is likely to come in below 6.5 per cent in Q2FY26, compared with the unexpectedly high 7.8 per cent seen in Q1,” Nayar said.

 

At its bi-monthly policy review meeting last Wednesday, the Reserve Bank of India (RBI) raised its Q2 growth estimate to 7 per cent, noting that domestic economic activity had “sustained momentum” in the September quarter. “An above-normal monsoon (and) buoyancy in the services sector, coupled with steady employment conditions, are supportive of demand, which is expected to get a further boost from the rationalisation of GST. Taking all these factors into account, real GDP growth for Q2 is now projected at 7 per cent,” it said.

 

However, the central bank also warned of risks from ongoing tariff and trade policy uncertainties, prolonged geopolitical tensions, and volatility in international financial markets.

 

“The transmission of GST rate cuts, resolution of the tariff issue with the US, and the rise in retail inflation will be key factors to watch in the second half,” Sengupta said. “In our estimate, growth in H2FY26 will be around 6 per cent, compared with 7 per cent in H1. A lot of one-off factors are no longer there in the second half.”