She added that early 2026 may bring growth uncertainties, giving the RBI room for another rate cut after December.
These are edited excerpts of the interview.
Q: Let me start with the GDP numbers. Our poll is only halfway through, but it is giving a very clear indication that we may get a number above 7% for the July, August, and September quarter. Where do you stand?
A: Yes, absolutely. I think September is going to be a number that is going to be close to 7.5%. December, too, we could be in the 7% plus range. So we’re talking about pretty strong growth over the first three quarters of the fiscal year. A lot of things have supported this, from good monsoons, low inflation, which raises purchasing power, tax cuts, front-loading of fiscal expenditure, especially in capex. All of this has come together very nicely.
But it’s also very important to look ahead, and some of these things could reverse in the March quarter, which is the final quarter of the financial year 2025-26 (FY26), and there are a few uncertainties which we can’t ignore. One uncertainty is that all of these goods and services tax (GST) boosts we are seeing — will that continue or will that fade? We are already seeing auto companies taking away some of the discounts, and some of the passenger vehicle registrations have come off, so we have to think about the longevity of all of the GST boost carefully.
The second is the fiscal drag. The government has spent a lot up front, but now nominal GDP growth is very low. Tax revenues are lower than budgeted. So, they may not have the firepower to spend very much in the March quarter. In fact, they may have to cut back on spending, and that could be a fiscal drag.
And the third is exports. We are finally seeing in the numbers that exports are slowing, especially to the US, but it’s not that we are being able to increase exports in a major way to the rest of the world either. So, I’m not seeing evidence of rerouting of exports. So, we could see 7% plus numbers for the first three quarters, but suddenly, in the fourth quarter, the numbers could dip to as low as 6%.
Q: Are we all being overcautious about our economy? Has the country’s potential growth increased for various reasons, the demographic dividend? When China was in the same situation as we were, they were reporting 12 to 14% GDP. So, probably we are in the 7 to 8% bracket. You don’t think this for the coming few years?
A: The uncertainties that I spoke about are uncertainties which we should think about very carefully. Globally, growth in 2025 has been pretty strong, higher than expected across the world, but a lot of it has also been led by front-loading of exports, because a lot of people fear what will happen once the tariffs kick in a major way. And because so many countries have already imported what they wanted for a year or so, exports in 2026 could be much lower.
And globally, growth may be weaker in 2026 compared to where it’s been in 2025, and India will be a part of that as well. So, while I’m very happy with all we have achieved, and we have achieved a lot, I do think we need to be careful about the uncertainties in the global growth environment in 2026.
Also Read | NBFCs push for reforms ahead of Budget 2026, FIDC seeks dedicated refinance window
Q: Let me come to inflation, where you will have a better picture since you also look at ASEAN. We have this 0.25% consumer price index (CPI) number, and much of this is because the wholesale price index (WPI) numbers are deeply negative. We have probably the fifth consecutive month of a minus wholesale price number. Does that continue? Because Asia is getting flooded with cheaper exports, which can’t go to the US. So, do we have an Asian disinflation-related low inflation in India for the better part of 2026?
A: Absolutely. Low inflation is going to be a new trend out there. And on the back of that, I’m going to argue that the RBI can remain growth supportive for a pretty long time. We can look at very short-term data. We got this 0.25% CPI number for October, and that did not even include all of the fall in the GST taxes. It only included a part of it, about one-third of the impact.
So that is also likely to come in a bigger way in the next couple of months. So inflation could remain low in the next couple of months, too.
Coming to 2026 and beyond, I have done a structural study in which I have looked at previous periods in which core inflation fell as dramatically as it’s falling now. Every time in the past, it was led by growth falling; it was the output gap widening that led to lower inflation. And therefore, it used to be very short-termish. As soon as growth rises, inflation would go back up again. This time, when I’m looking at the drivers of this disinflation, they are structural. It’s China’s overcapacity in manufacturing, which has led to cheaper imports, a phenomenon that has been built up over four decades. So that’s not going to go away very quickly. And it’s also RBI’s credibility that has been built over 10 years as the inflation targeter, that they will keep inflation low, and markets have started to believe that.
These are all structural drivers that are driving today’s disinflation, and that’s going to continue for a fairly long period of time. In terms of numbers, I would say for the fiscal year 2025-26 (FY26) average, inflation can be below 2% at about 1.8%, and for the fiscal year 2026-27 (FY27) I would say it can be at below 4% at about 3.8–3.9%, so these are pretty low numbers for several quarters.
Q: This makes the RBI renege on its mandate. It’s supposed to keep inflation above 2%. So how many cuts and what in December?
A: We do think that there is a cut in December, although I must say, markets are right now 50–50 on it, because they are saying, “Yes, we understand inflation is very low, but growth is extremely strong. Why should the RBI cut?” And my argument there is that the primary mandate of the RBI is inflation targeting. So, at this point, they’ll be looking at inflation a little more closely than they look at growth.
Even when I speak about growth, yes, it’s strong today, but I think in early 2026, things look a little bit uncertain on the growth front. So, on balance, RBI will be cutting in December and beyond that, we do have space for another rate cut, but it could be in February or April. But right now, I’m going to focus on the December cut.
Also Read | India looks well-placed for 2026 inflows as global investors broaden their bets: 3R Investment CIO
Q: Your terminal rate, therefore, is 5% for India, the repo rate?
A: Closer to that, yes.
Q: While it’s very good that inflation is coming in lower than what RBI thought, and growth is coming in higher than what RBI thought. What you are saying gives me the feeling that nominal GDP is going to be sub 9% not even sub 10% for 2026-27 as well.
A: WPI is a funny animal. If it’s going into deflation for the next two, three months, it could be a very strong positive number just one year down the line. So, from that perspective, the GDP deflator could be a little higher in 2026-27, and we could just about touch double digits in nominal GDP growth, just about 10%.
Q: The reason why I’m asking is, it’s not just the government’s fiscal deficit, it’s also EPS of companies that are linked to nominal GDP, and if that continues to come between 8 and 9, we have a problem in terms of earnings. Since you are also a strategist for HSBC, this is my question to you: do you see foreign funds therefore changing tack? The second quarter EPS growth has been far better; it ends a five-quarter drought. Do you think that we can upgrade the earnings forecast for the next four quarters? And do you see any sentiment change in FPI? Does it change into inflows anytime soon?
A: So, to the extent corporate earnings link up pretty well and are very correlated with nominal GDP growth, I think that December will not look very good in the sense that it’s going to be a quarter in which the real GDP growth will be higher than the nominal GDP growth, which basically means that the deflator will be negative. So, we have to keep that at the back of our minds when we think about corporate earnings. But as soon as we hit 2026, the base effects will turn favourable, and for 2026-27, nominal GDP growth could be closer to 10%, whereas in 2025-26 it was more like 7.5% percent. So some improvement on the margin there.
But, globally speaking, when we look at the region, because Indian equities haven’t done that well over the last year, some of the valuation gap vis-à-vis the region has corrected at this point, and things are beginning to look attractive. In fact, we are overweight on equities at this point; we’ve been so for the last one and a half, two months. And we can see — I meet a lot of clients, investors around the world — I can see the interest in India has crept back in.
Q: Do you think the currency stabilises below the 89 mark, or do you think 89 gets overshot? Any view that your team has on the rupee?
A: We’ve had a trade deficit number which has been extremely large. And while it could soften going ahead, it’s not going to fall dramatically. Gold imports will remain elevated for a while. Exports will remain challenged for a while. In fact, for 2025-26, we think the current account deficit will be 1.4% of GDP, which is almost $60 billion. Remember, last year was $25 billion.
So, the pressure on the currency could remain at this point, especially if we don’t see a deal between the US and India very soon. If we see a deal, it could be a game-changer. Sentiments can change very quickly. Markets might realise that a lot of the real adjustment has happened, and now maybe it’s time for the currency to perform. So, it’s a very binary view of the world: no deal, my sense is we can go towards 90; and if we have a deal, we could spring back to about the 87 range. So it’s a wide range.
A lot of it depends on the India–US deal, which is not just good for taking away a growth drag from the economy and bringing back equity flows, but over time, it could increase FDI inflows into the economy as people start seeing India as a good manufacturer.
Watch the interview in the accompanying video
Catch all the latest updates from the stock market here
rulet