India's economy grew at a surprising 7.8% year-on-year in the first quarter of 2026, exceeding the 7.2% forecast from a Reuters poll and the previous quarter's growth of 7.8%.
This growth was bolstered by improved trade relations, including a significant deal with the European Union and reduced tariffs from the U.S., which dropped from 50% to 10% following a Supreme Court ruling against previous tariffs. However, the onset of the Iran war at the end of February poses a serious risk to India's economic outlook, potentially dampening growth and increasing inflation.
The Reserve Bank of India has raised its inflation projection for the financial year ending March 2027 by 50 basis points to 5.1% and has adjusted its growth forecast down to 6.6% from 6.9%. The conflict has led to energy supply disruptions, inflating India's import costs and exerting pressure on the rupee amid significant foreign investor outflows.
Although inflation was under the Reserve Bank of India's target of 4% as of April, concerns about weather-related disruptions from El Nino could exacerbate food price inflation.
The Reserve Bank's shift to a 'cautious' policy stance reflects the deteriorating global economic conditions, indicating that investors should closely monitor these developments as they could impact India's economic trajectory