'Our projection of 6.7% GDP growth for FY26 allows room for potential upside': DBS Bank's Radhika Rao

First quarter growth was higher than expected at 7.8% and domestic demand is increasingly playing a key role in supporting the economy, notes Radhika Rao, Executive Director and Senior Economist, DBS Bank. In an interview with Business Today, she says that the impact of GST rate cuts on growth will be more material in the second half of FY26 and the early part of FY27. Edited excerpts:
 
Business Today: It’s been over a month now since the US tariffs came into effect. The goods and services tax rate cuts are also now in effect. How do you see these playing out on the Indian economy?
 
Radhika Rao: Growth posted a stronger-than-expected start to the financial year, with the first quarter at 7.8%, and the second quarter is projected to be 7% or above. This provides a robust foundation for overall growth.

Exports remain important, particularly to the US, though several sectors such as electronics, smartphones, and pharmaceuticals (generics) continue to operate outside the scope of tariffs. At the same time, domestic demand is increasingly playing a key role in supporting the economy. Over the past decade, reforms were largely supply-driven, but now there is a clear shift towards measures that stimulate demand, including cuts in the repo rate, adjustments in direct and indirect taxes, and higher government capital expenditure, which is more pronounced this year.

Rural demand has remained steady, and urban demand is now strengthening. We also expect private investment to gain momentum on the back of higher government expenditure. On the trade front, India continues to benefit from low energy prices, supporting the trade balance, while service exports remain strong, including software services and GCC operations. Taking all factors together, we estimate GDP growth at 6.7% for the financial year, with the potential for a modest upside. The RBI’s forecast is 6.8%.
 
BT: Is 7% GDP growth possible this financial year?

RR: Based on the second quarter GDP numbers, expected in late November, growth is projected at around 7%. This would put the first-half average at 7.4%. Our projection of 6.7% for the full year allows room for potential upside, especially if momentum builds from the US trade deal. We are optimistic about positive developments in this area and the impact they could have on growth.
 
BT: Do you expect the GST cuts to boost consumption on a durable basis?

RR: The GST rate cuts serve two purposes: they reduce the tax burden for consumers and improve the efficiency of the tax structure. While the effect on growth will be more material in the second half of FY26 and the early part of FY27, it is a positive structural development.

The procedural improvements in GST are also expected to be more material this year. The tax rationalisation particularly benefits product groups with a higher propensity to consume, such as essentials, footwear, textiles, and automobiles, which supports domestic demand sustainably.
 
In your recent note post the MPC, you mentioned including one rate cut in our trajectory for FY26. Do you think it is likely in December, and what factors would lead to it?

The RBI has reduced rates by 100 basis points this year, and we expect one additional cut. Market expectations range from 25 to 75 basis points. Beyond repo rate adjustments, credit growth in the non-bank space, including NBFC funding, capital markets, corporate bonds, and commercial papers, shows steady support for funding demand. We also observe moderate increases in credit and funding activity in FY25 compared to FY24 and in FY26 compared to FY25. Bond yields are expected to correct as the authorities have undertaken measures to address investors’ demands, including tweaks in the borrowing supply mix and dovish commentary by the central bank.
 
BT: The rupee has been under pressure again. What is your year-end and FY26-end forecast?

RR: The rupee is adjusting to global developments, including tariff considerations and regional equity trends. While foreign portfolio allocations are favouring AI and tech-heavy sectors in other geographies at this juncture, we expect improvements in corporate earnings and persistent interest from domestic investors to be supportive of the Indian stock indices. The RBI has historically taken measures to ensure stability, and we expect the rupee to see a mild appreciation by the end of FY26, reaching around 88. The real effective exchange rate (REER) has returned to below 100, indicating the currency is no longer overvalued and is well-positioned relative to peers. Overall, we see a stable trajectory for the rupee moving forward.