Economic growth decelerates in January–March, but tops expectations

GDP reading hits three-year high: India's GDP increased 7.8% on a year-on-year basis in January–March, following a 8.0% expansion in the prior quarter. This marks the first GDP figure released since the Iran war broke out but only covers one month of the conflict’s impact. Over FY 2025 as a whole (the 12 months to March 2026), GDP grew 7.7%, beating market expectations and the best figure in three years (FY 2024: +7.1%).

Consumer spending and exports slow: Relative to the previous period's data, readings in January–March softened for private consumption (+7.1% on a year-on-year basis vs +8.2% in October–December), exports of goods and services (+3.7% vs +5.8% in October–December) and imports of goods and services (+1.9% vs +7.2% in October–December). In contrast, readings picked up for government consumption (+4.9% vs +4.6% in October–December) and fixed investment (+10.8% vs +8.2% in October–December). On the downside, private spending lost steam, as inflation picked up and consumer sentiment wilted due to the Iran energy shock, while exports also decelerated amid U.S. tariffs and disruptions to trade with key markets in the Middle East. On the upside, public expenditure accelerated and fixed investment growth hit a nearly four-year high, as the government rushed to exhaust the capital spending allocated in its budget ending March.

GDP growth will continue to slow: GDP growth is set to hit a one-year low in April–June as the closure of the Strait of Hormuz weighs on consumer spending by stoking inflation and on exports by constricting trade with key commercial partners in the Middle East. The economy is then set to lose further momentum through October–December as inflation continues to pick up and insufficient rainfall hurts the key kharif crop harvest. The strength of this year’s El Niño weather pattern is key to watch, with the last ‘strong’ El Niño in 2023–2024 causing India’s monsoon to be the driest in five years. Moreover, the course of the Iran war will be important to monitor, with India vulnerable economically given its dependence on energy imports from the Middle East: Before the war, 45% of its crude oil imports, half of its LNG imports and 90% of its LPG imports passed via the Hormuz Strait.

Panelist insight: In light of the reading, analysts at the EIU said: “We retain our forecast for real GDP growth of 6.5% in 2026/27. The Reserve Bank of India (the central bank) held its policy rate at 5.25% on June 5th and maintained a neutral stance; we attach a 30% probability to a rate increase taking place in August or October should conditions around the monsoon or energy prices call for it. The rupee and government bonds will remain under pressure as concerns over the fiscal and current-account deficits rise.” Goldman Sachs’ Santanu Sengupta and Arjun Varma commented: “Going forward, the Middle-East conflict driven energy shock is likely to increasing weigh on economic activity as higher pump fuel prices can potentially dampen demand. Put together, given the stronger-than-expected Q1 GDP print […] our [FY 2026] growth forecast remains unchanged at 6.1% yoy.”

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