IMF lifts India growth forecast to 7.3% but flags AI and global risks

The International Monetary Fund raised its projection for India’s real GDP growth in fiscal 2025/26 to 7.3% in the World Economic Outlook update released on Jan. 19, upgrading its October forecast by 0.7 percentage point after stronger-than-expected activity in the second half of 2025. The WEO cited a stronger third-quarter outturn and "strong momentum in the fourth quarter" as the basis for the revision, aligning the Fund’s view closely with the government’s first advance estimate, which pegged FY26 growth at 7.4%.

The upgrade reflects a cluster of domestic strengths: resilient private consumption, sustained public investment and a notable expansion in the first half of the year that exceeded 8%, all of which offset softer external demand. The IMF also raised its global growth projection for 2026 to 3.3%, underscoring a broadly more optimistic near-term backdrop even as it cautioned that the boost to India’s rate of expansion may be temporary.

Crucially, the IMF expects the Indian economy’s pace to moderate once cyclical tailwinds and favorable base effects dissipate, projecting growth to slow to 6.4% in both FY27 and FY28. That trajectory implies a reversion from an elevated near-term spike toward a still-robust medium-term rate, raising questions for monetary and fiscal policymakers about sequencing and sustainability.

Inflationary pressures, the Fund noted, are set to ease further. After a significant decline through 2025, headline inflation is expected to return near the central bank’s target range, with subdued food-price inflation identified as a key driver. That disinflation narrative could give the Reserve Bank of India room to adopt a more accommodative stance later in the forecast horizon, but the IMF emphasized that policy responses should remain data dependent given the risk environment.

The WEO update highlighted several downside risks that could reverse momentum. The Fund warned that high expectations of AI‑led productivity gains risk creating an AI "dotcom moment" that could spark a sharp market correction with global spillovers. It also pointed to geopolitical tensions, trade shocks and possible financial-market stress as potential disruptors of India’s outlook.

Market implications are material: a sustained outperformance could lift corporate earnings and tax revenues, support credit growth and strengthen the rupee, but a retreat in global liquidity or a disorderly repricing of AI-related assets could transmit volatility through financial markets and trade channels. External vulnerabilities remain modest but are not negligible, meaning policymakers face a narrow corridor between nurturing growth and guarding against overheating or external shocks.

Private-sector forecasters voiced similar caution. Deloitte India economist Rumki Majumdar told Livemint she expects India to grow by "7.5–7.8% this fiscal year" followed by 6.6–6.9% in the next fiscal year, while flagging risks from US tariff policy, the outcome of India‑US trade talks and geopolitical disruptions to key shipping routes.

Longer term, the WEO’s judgment underscores a central challenge for India: converting cyclical strength into sustained higher productivity and investment-led growth. Structural reforms, investment in skills and infrastructure, and prudent macroeconomic management will determine whether the country can consistently outrun the global average or remains subject to the ebb and flow of temporary drivers and external shocks.