While India's external demand was subdued in the first quarter, the country registered unexpectedly strong growth fueled by robust domestic demand for the period.
What is Happening
India's GDP growth of 7.2 percent y-o-y suggests that the country's fundamental economic forces are healthy as the expansion was driven by private consumption, with public investment being critical to the process, as the government spent on roads, power, and other key areas.
In addition, India's goods production grew by 8 percent y-o-y, and construction added 9 percent y-o-y, driven by capital expenditure on roads and renewable energy and set a record number of digital payments.
Inflation
Peaking at nearly 6.5 percent, India's headline CPI inflation dropped to 4.5 percent, enabling the RBI to leave the key repo rate unchanged at 6.5 percent in April.
India's strong currency and large forex reserves enabled the central bank to take a wait-and-see approach to the exchange rate fluctuations without adding further pressure on the economy through unnecessary rate hikes.
The Outlook
India's growth prospects remain bright for FY26 as the overall growth is expected to come in at 6.8 percent, with increased exports and private sector investments set to drive the economy's growth in the next fiscal year.
However, India needs to ensure that its growth is not disproportionately reliant on a small number of export destinations and diversify its trade and investment ties while simultaneously reinvigorating private sector investment in capital-intensive industries to propel the economy to the next level of development.
India's phenomenal performance this fiscal year despite the difficult global environment is underpinned by robust domestic demand and public investment. However, the policymakers need to ensure that the current growth is transformed into productive capacities that will give the Indian economy the much-needed boost in the years to come.