Growth To Rebound To 7% By... - Axis Bank Forecast

In its India Economic and Market Outlook 2025 report, Axis Bank predicts a strong economic recovery, with Gross Value Added (GVA) growth expected to rebound to 7 per cent in FY26, up from 6.6 per cent in FY25. Despite challenges from fiscal consolidation, the outlook remains optimistic, driven by industry growth, a real estate upcycle, and agricultural resilience.

Growth Outlook: Strong Rebound Expected
Axis Bank’s Chief Economist Neelkantha Mishra, along with co-authors Prateek Ancha, Tanay Dalal, Pulkit Kapoor, and Smriti Mehra, forecast that India’s economy will see significant recovery in FY26. "We expect a 7 per cent growth in GVA in FY26, driven largely by industry and construction," Mishra said. The report highlights that while fiscal tightening in H1FY25 and a target fiscal deficit ratio of 4.5 per cent may pose challenges, growth headwinds will be limited to 30-40 basis points of GDP. Much of the growth is expected to come from industrial and construction sectors, buoyed by the real estate upcycle.
Agriculture is expected to maintain similar growth rates to FY25, assuming a normal monsoon, with some supply response to high food prices easing inflationary pressures. Public administration may grow at a slower pace due to a high base.

Inflation Remains Driven by Food Prices
Inflation continues to be a key concern, with food prices being the main driver. Axis Bank projects inflation to average 4.5 per cent in FY26, with a brief dip to 4 per cent in Q2FY26. However, the report notes that inflation is unlikely to remain anchored without favorable weather conditions and a strong supply response to meet the demand deficit.
“The MPC’s forecast of inflation reaching 4 per cent in Q2FY26 is heavily reliant on favorable weather and increased imports of key commodities,” Mishra explained. The report also highlights that inflation may stay above the mid-point of the target range due to base effects, limiting room for rate cuts.

Divergence Between Food and Core Inflation
A significant divergence between food inflation and core inflation has been observed over the past two years, raising questions about the appropriateness of the MPC's target for headline inflation. While food prices have fluctuated significantly, particularly due to vegetable prices, core inflation, driven by services and wages, remains more stable. Mishra stated, “Food prices are volatile, especially vegetables, which tend to experience significant seasonal fluctuations.” If previous patterns hold, the report suggests food inflation relative to core inflation should eventually decrease.