The Indian economy appears to have recorded a much stronger-than-expected performance in the first quarter of FY26, with GDP growth estimated between 6.8 per cent and 7 per cent, according to a report released by the State Bank of India (SBI).

This projection is notably higher than the Reserve Bank of India’s (RBI) earlier estimate of 6.5 per cent for the quarter, providing a more optimistic picture of short-term economic resilience.

Utilising its high-frequency indicators and econometric modelling, SBI pegged GDP growth at 6.9 per cent year-on-year, while Gross Value Added (GVA) — which removes the impact of indirect taxes and subsidies — was placed slightly lower at 6.5 per cent.

The report describes these numbers as statistically consistent with the economy’s medium-term trajectory, suggesting that the strong recovery observed in recent quarters has provided continuity in growth momentum despite global uncertainties.

While the first quarter outlook appears robust, SBI struck a cautious tone on full-year FY26 GDP growth, projecting it at 6.3 per cent, which is lower than the RBI’s forecast of 6.5 per cent. The revision, though modest, reflects anticipated moderation in the coming quarters due to both domestic and external headwinds.

The report noted that it has trimmed the RBI’s projections by 0.2 percentage points for Q2–Q4 FY26, implying that high growth in the first quarter may not be sustained at the same pace for the remaining months of the year.

Factors such as global trade weakness, slowing private investment cycles, and evolving geo-economic risks could weigh on momentum, even as domestic consumption and government spending continue to act as growth anchors.

A critical point highlighted in the analysis is the narrowing gap between real and nominal GDP growth. In Q1 FY23, the gap between the two stood at nearly 12 percentage points, driven largely by high inflation and elevated GDP deflators.

However, by Q4 FY25, the gap had shrunk significantly to 3.4 percentage points, reflecting a sharp fall in price-driven inflationary effects. Going forward, in Q1 FY26, SBI expects this divergence between nominal and real growth to narrow even further, owing to historically low inflation and moderating price pressures.

This trend is anticipated to reduce the GDP deflator, a measure that adjusts nominal growth to real terms. Consequently, while real GDP growth may remain healthy in the 6.8–7 per cent range, nominal GDP growth could ease to around 8 per cent.

SBI’s report warned, however, that the shrinking real-nominal gap could potentially mask underlying pressures in economic momentum. Traditionally, higher nominal growth provides space for both policymakers and corporates in terms of revenue mobilisation, fiscal consolidation, and earnings expansion.

A reduction in nominal growth—even amid strong real growth—may therefore imply slower expansion in fiscal revenues and corporate top-lines, possibly impacting fiscal management and business profitability.

The report underscored that this apparent paradox of robust real GDP alongside modest nominal growth requires close policy attention.

SBI’s analysis reaffirms India’s position as one of the fastest-growing large economies globally, with Q1 FY26 showing an encouraging growth range well above conservative estimates.

However, the report also emphasises that sustaining this momentum through the remainder of the year will be challenging, particularly given the expected moderation in external demand and cautious investment activity.

With fiscal and monetary space likely to remain balanced, the ability to nurture domestic consumption, maintain inflation discipline, and support key growth sectors will determine whether India can surpass the 6.3 per cent full-year growth projection and meet or exceed the RBI’s target of 6.5 per cent GDP growth in FY26.

Based On A NDTV Report