Economy accelerated in Q2FY26, momentum to sustain: Finance Ministry

Demand conditions across rural and urban India have improved through the second quarter (Q2) of 2025-26 (FY26), and the momentum gained in Q2 is expected to continue in the upcoming months, driven by resilient domestic economic activity and stronger demand supported by goods and services tax (GST) reforms, the Finance Ministry said on Monday.  

 

Despite a fog of uncertainty shrouding the global economy and lingering trade policy uncertainty, the ministry’s monthly economic review for September noted that India’s trade performance in H1FY26 reflects steady momentum and resilience, citing a 3 per cent rise in merchandise exports and a 6.1 per cent uptick in services exports. 

 

 

“Against a global backdrop characterised by economic and trade policy uncertainty, India’s economy gained momentum in Q2 FY26. This is particularly significant, as the United States imposed higher tariffs on India in August… Even as trade deal negotiations with the US continue, merchandise trade data for September 2025 presented early evidence of diversification of export destinations,” stated the review authored by officials in the Department of Economic Affairs’ economics division.  

 

Although global economic activity has remained robust despite a deteriorating trade outlook, prompting the International Monetary Fund (IMF) to revise its 2025 global growth estimate from 3 per cent to 3.2 per cent, the review cautioned that “interpreting this growth as durable resilience may be incorrect”.  

 

“The global economy witnessed short-term resilience in the aftermath of trade policy disruptions… However, this resilience seems to be fading. Core inflation and unemployment in the US have inched up. Momentum in China is slowing due to a moderation in export growth, following the front-loading of exports and a struggling property market. Growth impulse in the Eurozone remains muted,” it pointed out.  

 

The review also flagged the rise in long-term sovereign bond yields of major economies and said this could undermine the hedging role such bonds typically play in the financial markets. Moreover, it averred that an increase in macro-financial uncertainty may induce stress in the foreign exchange market, leading to elevated funding costs and increased foreign exchange volatility, which could spill over into other asset classes. 

 

“As of October 15, 2025, global equity markets have rebounded following an easing of the geopolitical tensions; however, this recovery is marked by significant concentration risks in certain segments. Consequently, any correction in equity markets has the potential to adversely impact the real economy through wealth effects,” the review cautioned.  

 

India’s growth outlook for FY26 remains strong, supported by a positive demand outlook due to GST reforms, favourable monsoons, lower inflation and monetary easing, the review underlined, while acknowledging that global uncertainties will “continue to affect external demand, presenting downside risks to the growth outlook”. “The implementation of various growth-enhancing structural reforms and government initiatives, including GST 2.0, is expected to mitigate some of the negative impacts of these external challenges,” the review said.

 

“Looking ahead, the lower GST rate is expected to support a positive demand outlook by reducing the tax burden on consumers and businesses, stimulating consumption and investment across sectors and boosting employment generation in the economy. Moreover, a strong performance in the industries and services sector, along with a stable labour market, will further enhance domestic demand,” the review said.

 

Inflation, the report noted, has remained well under control, supported by deflation in food categories, and policy measures such as the GST rate rationalisation are expected to keep price rise moderate while supporting consumption demand. “The overall prices are likely to remain soft in FY26,” it concluded, adding that the overall outlook for food production remains positive despite a dip in areas sown for oil seeds and cash crops and some crop damage from extreme weather events.

 

Terming the Reserve Bank of India’s latest regulatory and development policy measures announced this month as a “signal” of “a calibrated response of the central bank to the evolving macroeconomic conditions, combining prudence with comprehensive structural reforms”, the review welcomed the steps aimed at strengthening the banking sector, improving credit flow, promoting ease of doing business, simplifying foreign exchange management, and internationalising the Indian Rupee.

 

“The full implementation of these measures is anticipated to enhance the efficiency of credit allocation, strengthen the resilience of the banking sector, and facilitate the economy's integration into global financial markets under more favourable conditions,” the review concluded.