Strong Growth, Uncertain Stability

The recently released economic performance figures for FY 2025–26 have reinforced confidence in India's resilience amid an increasingly turbulent global environment. The economy recorded a growth rate of nearly 7.8 percent in the quarter ending March 2026, a figure that represents far more than a statistical achievement. It reflects the underlying strength of an economy that has weathered a series of external shocks, including the sharp escalation of U.S. tariff measures and the subsequent military conflict involving Iran, Israel and the United States. Together, these developments triggered significant disruptions in global energy markets and heightened uncertainty across international investment flows. That India has managed to sustain its growth momentum despite such challenges is a testament to the adaptability of its economic policymaking, including calibrated reductions in GST rates and the expansion of free trade agreements with several advanced economies.

This positive outlook has been further reinforced by the Reserve Bank of India's latest monetary policy review. By maintaining the policy repo rate at 5.25 percent, the RBI has demonstrated a balanced approach aimed at safeguarding economic activity without compromising macroeconomic stability. The decision signals that the central bank is not solely focused on inflation management but is equally mindful of preserving financial liquidity within the economy. At a time when rising prices of petrol, diesel and LPG have placed additional strain on household budgets and business costs, such a stance offers an important cushion against broader economic stress.

Equally noteworthy is the government's decision to grant complete relief from capital gains taxation on investments in government securities for foreign investors. The measure is expected to attract as much as USD 50 billion into India's debt markets. Beyond the immediate investment inflow, such capital could strengthen foreign exchange reserves, support rupee stability and contribute to long-term financial equilibrium. In many ways, this initiative may prove to be one of the most significant policy foundations for enhancing the credibility and resilience of the Indian currency over the coming years.

Yet, despite encouraging growth figures and proactive policy interventions, several emerging concerns deserve serious attention. Geopolitical tensions in West Asia, particularly the Iran–United States conflict, have exerted considerable pressure on global energy markets. Crude oil prices, which were trading near USD 60 per barrel before the escalation, surged to nearly USD 110 per barrel. The resulting increase in India's import bill is expected to widen the current account deficit, with projections suggesting it could approach 1.5 percent of GDP, substantially above the 0.5 percent level assumed in the Union Budget.

The government's response has reflected the severity of these pressures. Citizens have been urged to reduce petroleum consumption and defer discretionary gold purchases. Simultaneously, excise duties on gold have been raised significantly, while petrol and diesel prices have been increased on multiple occasions. Although cumulative fuel price increases remain below Rupee 10 per litre, domestic LPG prices have also been revised upward, placing an additional burden on ordinary households already grappling with elevated living costs.

Perhaps the most visible impact of these developments has been on the Indian rupee. From around Rupee 85 per U.S. dollar in April 2025, the currency has weakened to nearly Rupee 96 per dollar within a year. This depreciation of approximately 13 percent ranks among the more significant episodes of currency weakness witnessed in recent decades. Consequently, despite maintaining robust economic growth, India has once again been classified as the world's sixth largest economy in nominal dollar terms. The Reserve Bank itself has acknowledged these pressures, revising its inflation projection upward from 4.6 percent to above 5 percent while lowering its growth estimate for the current fiscal year from 6.9 percent to 6.6 percent. Another area of concern is the continued withdrawal of foreign institutional capital from Indian equity markets. The information technology sector, in particular, has come under substantial pressure. The rapid rise of global artificial intelligence-driven enterprises and shifting investor preferences have significantly affected the valuation of traditional IT firms. India's Nifty IT Index has already declined by more than 22 percent, a development that reflects not merely market volatility but a deeper transformation in the global technological landscape. The challenge is no longer cyclical; it is structural, and it underscores the urgency of accelerating India's competitiveness in emerging technologies.

Important signals are also emerging from the banking sector. Deposits exceeding Rupee 5 crore now account for nearly one-third of total banking deposits, while accounts holding more than Rupee 1 crore already constitute over 45 percent of aggregate deposits. Much of this concentration can be attributed to relatively high deposit rates, with banks offering returns between 7.5 and 8 percent to large depositors. As a result, bank deposits have become increasingly attractive relative to equities and mutual funds for affluent investors.

This trend raises a broader question: are the savings of middle-class and lower-middle-class households growing at a comparable pace? The answer carries significant implications for the long-term inclusiveness of economic growth. Equally important, though receiving far less public attention, is the rise in India's debt to GDP ratio. The ratio has increased from the budgeted estimate of 56.1 percent to approximately 57.85 percent. This increase is not primarily the result of excessive borrowing but rather reflects an economic base that has expanded more slowly than anticipated. Nevertheless, it complicates the government's objective of reducing the debt to GDP ratio to 50 percent by 2030–31.

The broader lesson is clear. In the years ahead, sustaining high growth rates alone will not be sufficient. The greater challenge will be to preserve currency stability, strengthen external sector resilience, attract durable foreign capital and ensure that economic expansion translates into a broader and more balanced distribution of prosperity. India's growth story remains impressive, but its long-term success will ultimately depend on the quality of macroeconomic stability that accompanies it.

*Dr. P.S. Vohra is a Author & Expert in Economic Affairs. Views are personal*