ADB Trims India’s Growth To 6.5% For FY26: Can Strong Domestic Demand Cushion The Blow From US Tariffs?

The Asian Development Bank (ADB) has trimmed India’s growth forecast for FY26 to 6.5%, down from its earlier projection of 7%, citing the negative impact of fresh US tariffs on Indian exports. The downgrade

comes despite India posting an impressive 7.8% GDP growth in Q1, powered by consumption and government spending.Why The Downgrade?According to ADB’s Asian Development Outlook (ADO) September 2025 report, additional US tariffs , some as high as 50% on certain imports, are expected to dent India’s export momentum in the latter half of FY26 and into FY27. Net exports, which were already under strain, are now expected to subtract more from GDP growth than previously estimated.However, the bank noted that the overall hit to growth will be less severe than feared, since exports form a relatively small share of India’s GDP. Rising shipments to alternative markets, robust services exports, and steady domestic demand are expected to offset some of the pain.Fiscal And Current Account PressuresThe ADB warned that India’s fiscal deficit could breach the budgeted 4.4% of GDP, largely due to slower tax collections following GST rate cuts that were not factored into the Union Budget. Expenditure, however, is expected to remain on course, with capital spending seeing a notable rise of 32.8% in the first four months of FY26.

• FY25 Fiscal Deficit: 4.7% of GDP
• FY26 Projection: Likely to stay below FY25 but above budgeted 4.4%
• Current Account Deficit (CAD): Estimated to widen from 0.6% in FY25 to 0.9% in FY26 and 1.1% in FY27

Despite muted import growth, capital inflows are expected to weaken amid global uncertainty, which could lead to some drawdown of India’s foreign reserves , though these remain at robust levels.Inflation OutlookOn inflation, ADB has provided some respite. The forecast for FY26 has been lowered to 3.1%, thanks to faster-than-expected declines in food prices. Core inflation is projected to hover around 4%. However, FY27 inflation could climb as food prices normalize to long-term trends.Monetary And Fiscal ResponseThe Reserve Bank of India (RBI) has already shifted to a more accommodative stance:

• Repo rate cut to 5.5%, the lowest since August 2022
• 100-bps reduction in CRR in phased tranches to infuse liquidity
• Lending rates on new loans have already eased by 60 bps between February and July 2025

On the fiscal side, revenue growth has lagged (down 7.5% in tax collections), but higher dividend transfers from the RBI (Rs 2.7 trillion) have partially cushioned the shortfall. Subsidies fell overall by 9.6%, though fertilizer subsidies surged 36.9% due to global price spikes.Global Context And RisksADB cautioned that foreign direct investment inflows remain subdued, as global investors adopt a wait-and-watch stance amid heightened trade tensions between the US, EU, and Asian economies. With Washington’s tariff policy now targeting more categories of Indian goods, economists expect export-oriented industries like textiles, chemicals, and light engineering to face headwinds.Even with tariffs weighing on exports, India’s growth story remains anchored in its strong domestic demand, service sector resilience, and supportive monetary policy. While FY26 growth will likely moderate to 6.5%, experts believe India still stands out as one of the fastest-growing large economies in the world.