Economic growth saw a deterioration in July-August FY2026, with the YoY prints in 10 of the 17 non-agri indicators easing vis-à-vis Q1 FY2026, as excess rains adversely impacted activity across some sectors, the GST rationalisation announcement led to some deferment of discretionary purchases, and the 50% US tariffs weighed on exports and production. Looking ahead, the outlook for private consumption for H2 FY2026 has been brightened by the GST rationalisation, which should offset some of the sting owing to the US tariffs and penalties, notwithstanding the adverse impact of the same on exports and private capex, and potential job losses in export-oriented sectors.

• Given the earlier-than-expected implementation of the GST cuts at the start of the consumption-heavy festive period, the moderate revenue likely to be foregone in H2 of the ongoing fiscal, and the stronger-than-expected Q1 FY2026 GDP print, ICRA now assesses the FY2026 GDP growth at 6.5%.
• The GST rationalisation could dampen the headline CPI prints by ~25-50 bps during Q3 FY2026-Q2 FY2027 relative to our earlier estimate, taking the average for FY2026 to ~2.6%.Nevertheless, ICRA expects a status quo in the October 2025 policy review, owing to the positive impact of GST rationalisation on GDP growth in H2 FY2026. India's current account deficit (CAD) may exceed ~1.0% of GDP in FY2026, if steep US tariffs (and penalty) prevail till end-March 2026, while remaining manageable.