India GDP Forecast 2025-26 Raised to 6.5% by S&P: Key Drivers & Global Risks Explained

Energy Economics: The Double-Edged Sword of Oil Prices

India is the third largest oil importer in the world, and imports account for more than 90% of its crude oil and 50% of its natural gas. So, as a consequence of that dependency, the economy is more exposed to swings in global oil prices.

As luck would have it for the time being, crude prices have declined to the range of $78–$82 per barrel, down considerably from $100+ as recently as 2022, and that has obvious implications for inflation, the current account deficit, and input costs for a range of industries from transport to chemicals.

Table: India’s Crude Oil Import Bill vs Brent Crude Price

A continued decline in oil prices would help the RBI stay accommodative and support fiscal stability. But S&P warns that any flare-up in Middle East tensions could reverse this trend quickly.

RBI’s Monetary Policy: A Growth Ally

After a period of rate hikes between 2022 and 2024 to tackle inflation, the Reserve Bank of India has shifted its tone toward calibrated easing. While the repo rate remains at 5.50% (as of June 2025), signs point toward potential cuts later this year, especially if inflation stays within the 4–5% range.

Lower interest rates make loans cheaper for both consumers and businesses. This stimulates investment in housing, automobiles, and capex-heavy sectors like manufacturing and infrastructure.

Key Takeaway:
A more supportive monetary policy could accelerate private sector expansion, particularly in real estate, NBFCs, and MSMEs.

Income Tax Concessions: More in Hand, More Spent

One lesser-discussed factor supporting S&P’s growth revision is direct tax relief for middle-income earners. In the recent Union Budget, the government increased standard deductions and extended tax rebates for the ₹5–15 lakh annual income segment.

This has two effects:

1. Higher disposable income, encouraging spending on durables, services, and travel
   
   

2. Increased consumer confidence, especially in Tier 2 and Tier 3 cities
   
   

Example:
Two-wheeler sales have jumped 6.5% YoY in April–May 2025, while FMCG rural demand has seen its first double-digit growth in six quarters.

Risks on the Radar: Geopolitics and Trade Tensions

S&P’s optimism is tempered by significant global risks — the biggest being escalating tensions in the Middle East. Over the last two weeks, the US has launched strikes on Iranian nuclear sites, while Israel and Iran continue to exchange military responses.

This raises the specter of:

• Oil price spikes
  
  

• Supply chain disruptions
  
  

• Investor flight to safety
  
  

Another concern is the uncertain global trade outlook. With the US pushing for higher import tariffs on certain goods and ongoing realignments in global supply chains, emerging markets could see a decline in foreign direct investment and export orders.

Key Insight:
India’s relatively lower dependence on exports (~20% of GDP) offers insulation, but sectors like IT services, auto exports, and pharma could still feel the pressure.

India’s Strength: Resilience in Domestic Demand

India's growth is not dependent on external consumption and services, as is the case in many Asian economies integrated into global export chains. Growth is powered by consumption and services delivered through India - where more than 60% of GDP is derived from private consumption and domestic services. 

As a result, India is less vulnerable to global slowdowns from this domestic buffer, in comparison to Vietnam, Taiwan, or South Korea.

S&P stated:

“India is among the least exposed to goods exports and may be better positioned to weather global demand shocks through resilient household and services demand.”

This means India could continue growing even if global trade weakens, as long as inflation is under control and job creation remains steady.

What This Means for Businesses and Investors

S&P’s revised outlook isn’t just a macro headline — it carries real implications for corporate strategy and market positioning.

 Which Sectors Benefit Most?

• Infrastructure & construction: Capex revival is on track, and rate cuts could unlock housing demand.
  
  

• Consumer durables: More disposable income and rural demand support.
  
  

• Financial services: Credit growth set to expand, especially for MSMEs.
  
  

• Automobiles: Tax concessions and rural demand bode well for two-wheelers and entry-level cars.
  
  

Investor Takeaways

• Domestic-focused stocks are likely to outperform export-heavy sectors.
  
  

• PSUs in oil & gas may see volatility due to geopolitical risks.
  
  

• Banking & NBFCs with strong rural and Tier 2/3 exposure could benefit from consumption-led growth.

Final Thoughts: Can India Meet — or Beat — the 6.5% Target?

India’s 6.5% GDP forecast for FY26 looks achievable — but not guaranteed. Several conditions must hold steady:

• Normal monsoon

• Stable or falling oil prices

• RBI easing cycle

• No major external shocks

If these factors play out as expected, India could not only meet but potentially exceed the 6.5% mark, especially if private investment and capex spending gain steam.

But any sharp escalation in geopolitical risks or inflation could derail this momentum. For now, India finds itself in a sweet spot — but one that requires careful policy navigation and risk management.