India is currently experiencing a phase of robust growth coupled with low inflation, as per a report by HSBC Global Investment Research. Economists recommend a shift towards a near-neutral policy to sustain this balance in 2026, advocating a mix of fiscal discipline and continued monetary accommodation. The report emphasizes that aligning fiscal restraint with monetary ease would benefit various asset classes and the overall economy.
The research firm highlights the importance of addressing underlying weaknesses like inadequate corporate investment and foreign inflows. Bond markets have already factored in increased state borrowing for early 2026, anticipating potential foreign inflows due to RBI bond purchases and fiscal prudence. The report also mentions that equities could see gains from recent reforms, nominal GDP growth, and reasonable valuations, but sustainable progress hinges on structural reforms to enhance corporate capital expenditure and foreign investments.
Pranjul Bhandari, Chief India Economist and Strategist, projects that inflation will likely hover just below the 4% target next year, alleviating pressure on the Reserve Bank of India to tighten policies and allowing room for further easing if growth weakens. Bhandari notes a divergence from market expectations of tight monetary policies and loose fiscal measures, emphasizing the potential for additional easing if growth falters. Global factors such as tariff news, bond index inclusion, and changes in developed market yield curves are also influencing Indian markets significantly.
The central government aims to reduce public debt ratios to pre-pandemic levels by FY31, necessitating sustained fiscal consolidation over the next five years. The report underscores that central-level consolidation, coupled with privatization to mitigate growth constraints, could restore equilibrium. Despite the 3% fiscal ceiling in place to curb deficits, some states are projected to witness a rise in public debt ratios, as per the report.
