After two years of keeping the policy rate constant at 6.5% (which followed +250bps of cumulative hikes in 2022-2023 to contain inflation), the Reserve Bank of India (RBI) started a series of four policy rate cuts in February 2025 (-125bps cumulative) as inflation slowed from 5% in 2024 to 2.2% in 2025. We project CPI inflation at 4.7% in 2026 due to inflationary pressures stemming from the Hormuz closure and a strong El Niño event, forcing the RBI to enter a tightening cycle, with the policy rate expected to reach 5.75% end of 2026. We expect inflation at 5.2% in 2027 and 4.2% in 2028, while the policy rate will remain at 5.75% in 2027 before 5.50% in 2028.  

The fiscal deficit has gradually declined since the Covid-19 years and is expected to stabilize around pre-pandemic levels over time. However, the fiscal deficit will worsen in 2026 as governments deploy targeted subsidies in response to the Strait of Hormuz disruptions. But we expect fiscal consolidation to resume in 2027 as the subsidy measures are phased out. Over the medium term, broadening the tax base and strengthening tax compliance will continue to support the consolidation of public finances.

Overall, indicators show that financing risk is low in the short-term. In the medium run, the indicators that need monitoring are (i) the current account deficit and still moderate foreign direct investment inflows, (ii) public finances, with a large fiscal deficit and (iii) the financial sector, with vulnerabilities surrounding non-bank financial corporations. 

The current account deficit is expected to widen beyond that of 2025 (0.9% of GDP) to 2% in 2026, driven primarily by a significantly higher fuel import bill resulting from the Strait of Hormuz disruptions and the associated surge in energy prices. As these pressures subside, the current account balance is projected to gradually revert toward 1.5% in the coming years. Foreign direct investment inflows have been increasing but still remain relatively moderate compared to pre-pandemic levels. The upwards trend is expected to continue, provided adequate liberalizing reforms are implemented and geopolitical and commercial tensions are kept under control. Regarding public finances, the public debt-to-GDP ratio shot up with the Covid-19 crisis and seems to be stabilizing at the high level of around 80% (vs. c.70% before the pandemic). Finally, the resilience of the financial sector has somewhat improved since 2022, with private sector banks’ gross non-performing-loans ratio remaining stable around 2.5% since 2024, down from 5.9% in March 2022. However, non-bank financial corporations, subject to high concentration risks, should be closely monitored as their importance in the financial sector continues to grow, reinforcing risks of spillovers.

India's business environment is below average in our assessment of 185 economies, with little change in recent years. The Heritage Foundation's 'Index of Economic Freedom' survey in 2026 assigns India rank 132 out of 184 economies (down from 128 in 2025). It scores well on tax burden, government spending, business freedom and monetary freedom, but weaknesses remain in fiscal health, investment freedom, financial freedom, government integrity, property rights and judicial effectiveness. Meanwhile, the World Bank's 'Worldwide Governance Indicators' survey shows scores that have broadly stagnated since 2019 in the rule of law, regulatory quality and government effectiveness whereas control of corruption has edged down slightly. Our proprietary 'Environmental Sustainability Index' puts India at rank 99 out of 217 economies, continuing to improve and reflecting better performance in energy use per GDP and CO2 emissions per GDP, but weaknesses in terms of climate change vulnerability, renewable electricity output and the recycling rate.

India’s political risks remain low as the current coalition government led by the Bharatiya Janata Party (BJP) continues to advance its policy agenda. Following state assembly elections in May 2026, the NDA commands state-level governments in 22 of India's 36 states, reinforcing its policy continuity. The next round of state elections in early 2027 will test regional dynamics and youth sentiment. Domestically, the government will continue advancing economic reforms in infrastructure, digitalization, defense manufacturing and green transitions. Externally, relations with the US have stabilized following 2025 tariff salvos, despite a 10% US tariff imposed in July 2026 on select imports and risks surrounding US sanctions on Russian oil buyers. Meanwhile, India's foreign policy continues its pragmatic diversification through Southeast Asia and the Gulf while leveraging free-trade agreements with the UK, EU, Oman and New Zealand alongside its active role in the BRICS bloc.