Report highlights:

Axis Bank projects above-trend, above-consensus growth of 7.5% in the world’s fastest-growing large economy.

The authors’ thesis rests on several drivers:

1.       Receding fiscal drag and supportive monetary policy to drive above-trend growth of 7.5%. Structural reforms and regulatory easing to boost growth in the medium term.

2.       Improved financials, low cost of capital, high-capacity utilization (need for new capex) to lift capital expenditure in FY27.

3.       Sustained TFP gains and a rebound in capital formation support a 7% trend growth outlook.

Headline inflation of ~4% likely in FY27, but economic slack to persist

§  Median inflation, a better gauge of underlying price pressures, has been stable at ~3% for 18 months signalling persistent slack in the economy.

§  Axis Bank expects FY27 headline inflation of ~4% despite above-trend growth and a likely rebound in food prices.

§  Policy rates have likely bottomed, but money supply can rise further to aid monetary transmission and credit growth; supply-side measures (more T-bills, shorter-duration bonds) can reduce the yield curve steepness.

§  Axis Bank expects 10Y yields to drift close to 6% in FY27.

India’s external balance is stable, USD-INR weakness helps

§  The INR’s recent weakness has brought the REER to competitive levels.

§  Axis Bank expects the current account deficit to widen a notch, to 1.2% of GDP in FY26 and 1.3% in FY27, while the surge in capital outflows seen in 2Q/3Q of FY26 will likely abate.

Economic Outlook 2026: ‘Look! Growth above trend but low inflation’.

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