India’s Inflation Expected to Average Below 2% in FY26, Says HSBC; Growth Outlook Upgraded to 7.7%

Written By Mohit Singh

India’s inflation trajectory appears set for a significant shift, with HSBC Global Investment Research forecasting that average inflation will fall just below 2% in FY26, and remain well under the Reserve Bank of India’s (RBI) 4% target through FY27. The projection marks one of the most optimistic inflation forecasts in recent years, signaling a strong disinflationary trend backed by tax reforms, easing food prices, and structural improvements in core inflation.

The outlook comes after October retail inflation dropped to 0.25%, the lowest in years, following substantial GST tax cuts introduced earlier in the fiscal year. HSBC’s analysis suggests that only one-third of the impact of those GST reductions has materialised so far, leaving “room for further decline” in consumer prices in the months ahead.

The prediction arrives during a phase of rapid economic expansion, with official data showing 8.2% GDP growth in Q2 FY25, up from 7.8% in Q1. According to the Ministry of Finance, India could close FY26 with growth at 7% or higher, reinforcing its position as the world’s fastest-growing major economy.

Key Features

1. Declining Core Inflation Showing Long-Term Stability

HSBC’s report argues that India’s declining core inflation — which excludes volatile food and fuel components — represents a more durable shift than seen in earlier periods of low inflation.
The report states:

“We don't think it's only about short-term GST tax cuts and low food prices. The fall in core inflation is more long-lasting than past episodes, and this will influence monetary policy.”

This suggests that India’s monetary environment could shift from inflation management to growth reinforcement, especially if low inflation persists through FY27.

2. GST Cuts Yet to Fully Reflect in Prices

GST rate reductions on essential goods and mass-consumption items played a major role in cooling retail inflation beginning late 2024. However, HSBC notes that only about one-third of the expected price correction has surfaced.

This means consumer goods, services, and some manufactured items may continue to see a progressive decline in prices over the next two to three quarters as businesses adjust pricing strategies.

3. Upgraded Growth Forecast for FY26

HSBC has revised its GDP projection for FY26 sharply upward to 7.7% from its earlier estimate of 6.9%. However, the firm believes actual economic activity on the ground will likely be closer to 6.7%, factoring in statistical distortions and deflator-related anomalies.

Pranjul Bhandari, Chief India Economist at HSBC, said that India’s September quarter growth benefitted from a combination of factors including:

• Strong rainfall
• Ongoing monetary easing
• Elevated fiscal spending
• Demand spurred by GST reductions

She highlighted that certain deflator discrepancies may have understated inflation and overstated real GDP growth by nearly 1.2 percentage points.

4. Government’s Outlook Consistent With Strong Growth

Central government’s Chief Economic Advisor V. Anantha Nageswaran recently reaffirmed the growth optimism, saying that India is positioned to record 7% or higher GDP growth in FY26.
This aligns closely with HSBC’s forecast and indicates consensus among policymakers and global institutions regarding India’s economic resilience.

Impact Analysis

Economic Implications

A dip in inflation to below 2% would have sweeping consequences:

Positive impacts:

• Lower borrowing costs: With inflation well below target, the RBI may be encouraged to extend its monetary easing cycle.
• Boost to household purchasing power: Lower prices enhance real incomes, benefiting consumption-driven sectors such as FMCG, retail, and autos.
• Cost stability for industry: Lower input inflation supports manufacturing profitability, especially MSMEs.

Challenges:

• Deflationary risk: If inflation dips too low, demand may cool, especially during periods of fiscal tightening.
• Export competitiveness: Strengthening rupee and higher domestic costs compared to global peers could put pressure on exporters.

Fiscal and Policy Considerations

Growth is expected to remain strong until December 2025, but HSBC warns of a softening in the March quarter due to:

• Waning impact of GST cuts
• Slower government spending aimed at meeting deficit targets
• Weakening exports following the 50% tariff measures imposed on select goods

Lower inflation also means the government could face reduced indirect tax collections, especially from GST, unless offset by higher consumption.

Social and Industrial Impact

If inflation stays benign through FY27, consumers across income brackets will benefit from:

• Lower prices of food and essentials
• Potential reduction in EMI burdens if the RBI accelerates rate cuts
• Improved affordability in housing and services

Industries likely to gain include:

• FMCG and consumer durables
• Real estate
• Banking and financial services
• Automobiles
• Infrastructure and construction (through lower input costs)

However, sectors dependent on export demand — textiles, chemicals, engineering goods — may face pressure from global slowdown and tariff impacts.

Expert Opinions and Public Response

Economists welcomed the data but cautioned against over-interpreting short-term trends.
Several analysts note that India’s shift from inflation concerns to disinflation is notable, given that just a year ago, discussions around stagflation risks dominated policymaking circles.

Public sentiment, especially on social media, has largely focused on relief from steadily falling prices of essentials. Consumer groups expect further reductions as the full effect of GST cuts materialises.

Future Outlook

HSBC expects India to maintain a “sweet spot” over the next two years: strong growth, low inflation, and policy stability.
But the report warns of several risks:

• Global slowdown
• Oil price shocks
• Geopolitical tensions
• Delayed transmission of tax cuts
• Fiscal consolidation pressures

Nonetheless, if structural improvements in inflation dynamics hold, India may enter FY27 as one of the few global economies managing simultaneous growth and price stability — a rare economic achievement.

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Our Final Thoughts

India’s inflation outlook has shifted dramatically, moving from inflation anxiety to disinflation optimism within a year. With GST cuts, improved supply chains, and structural cooling in core inflation, the economy seems better positioned for sustainable growth. Still, maintaining this balance will require careful fiscal management, consistent policy direction, and close monitoring of global headwinds. India’s next two financial years could mark a turning point — not just in statistical terms, but in the lived economic experience of millions.

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