The investment bank now expects fiscal and external conditions to improve as strong economic growth, low inflation and easing tensions in the Middle East lead to lower crude oil prices and support for economic activity. It also raised its FY27 GDP growth forecast by 40 basis points to 6.5%.
The bank noted that India remained resilient during the Middle-East shock as fiscal and semi-fiscal measures absorbed much of the earlier energy-price hike, limiting pass-through to consumers and helping sustain consumption through March and April. Real GDP growth in Q1 CY26 was printed at 7.8% year-on-year, nearly 50 basis points higher than Goldman Sachs’ previous estimate, driven by stronger investment and services activity.
According to the report, the recent peace deal has removed the main threat to India’s macro trajectory by improving global crude prices and easing supply constraints. “The recent US-Iran peace deal should improve India’s growth outlook,” Goldman economists Santanu Sengupta and Arjun Verma wrote, noting that lower oil prices “have raised the risk of excess fuel being passed on to consumers.”
At the same time, signals weakened during the conflict are beginning to return to normal. Investment-related metrics such as port cargo traffic showed a recovery in May, with port cargo traffic growth at a four-month high as supply constraints eased from their March-April trough. Goldman Sachs said high-frequency data in April and May pointed to resilience in both services and manufacturing, underpinned by robust three-wheeler and passenger-vehicle sales, strong services exports and firm manufacturing activity.
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Consumption, Investment and Fiscal Space
The bank expects consumption growth to moderate in Q2 and Q3 of 2026 as households absorb the impact of previous pump price increases, with a slight increase in Q3. It flags weather-related uncertainty and the Indian Meteorological Department’s forecast as a near-term headwind, “especially for rural consumption growth”.
However, Goldman Sachs does not see an “additional drag on consumption” from Q4, arguing that the path to lower oil prices suggests limited need for further increases in retail fuel prices. On the investment side, gross fixed capital formation rose to a six-quarter high of 10.8% year-on-year in Q1 CY26, supported by robust automobile production and robust imports of investment goods, and the report notes that easing supply disruptions should lead to further recovery.
A calm-driven correction in commodity markets is also easing fiscal pressures. A sharp decline in global urea prices and lower crude benchmarks are expected to reduce upside risk in the fertilizer subsidy bill compared to earlier expectations and “help alleviate near-term fiscal pressures,” the government has already indicated that FY27 fertilizer subsidy requirements may be reassessed.
Following a softer crude path and moderate petrochemical prices, Goldman Sachs cut its headline CPI inflation forecast by 20 basis points to 4.4% year-on-year for CY26 and 30 basis points to 4.9% for FY27. The bank cut its core commodity inflation forecasts for CY26 and FY27 by 30 basis points and 50 basis points to 3.2% and 4.1%, respectively, leading to lower overall core inflation estimates of 4.2% and 4.5%.
Despite this disinflationary impulse, economists have maintained the Reserve Bank of India’s cumulative base-case call of 50 basis points in rates in 2026—25 basis points each at the October and December policy meetings—taking the repo rate to 5.75%. They warn that if the pass-through from elevated polymer prices is more limited, or if petrochemical prices remain low for longer, “there is a risk that the RBI may stall the policy tightening cycle.”
On the external side, Goldman Sachs cut its current account deficit forecast for CY26 by 20 basis points to 1.1% of GDP. The improvement reflects the oil import bill—now estimated at about US$215 billion, or 5.5% of GDP—and stronger-than-expected remittances, now estimated at US$140 billion (3.7% of GDP), up from US$138 billion. Incorporating the new current-account assumptions, the Bank now expects a balance-of-payments surplus of 0.7% of GDP in 2026, up from 0.6% previously.
FX scenario and market implications
In currencies, Goldman Sachs believes that the Reserve Bank of India’s recent capital-flow measures, announced at the June monetary policy meeting, will “help prevent depreciation in the USDINR.” Its FX strategists see the rupee as fair value on a trade-weighted basis, somewhat expensive against the Chinese yuan but relatively cheap against many high-carry emerging-market currencies, and recently recommended shorting the Thai baht against the Indian rupee.
An improved macro profile—higher growth, lower inflation, a narrow current account deficit, and easing fiscal pressures—strengthens India’s relative position among major emerging markets in the wake of the US-Iran peace deal, the report suggests. For investors, Goldman Sachs insists the note should be considered “only one factor” in investment decisions, but the direction of the correction underscores a more constructive stance on India’s medium-term macro outlook.
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