New Delhi: Goldman Sachs expects the Reserve Bank of India (RBI) to deliver one more rate cut during the ongoing fiscal year, likely in December, citing benign inflation and easing food prices, a top economist at the US-based investment bank said.
Inflation is expected to remain around 3% by calendar year-end and close to 4% in early 2026, Santanu Sengupta, chief India economist at Goldman Sachs, told Mint in an interview.
“With food inflation easing and GST cuts feeding through, RBI has room to ease further despite shifting guidance to neutral,” he said.
To be sure, the RBI has delivered two rate cuts in FY26 so far, a 25-basis-point cut in April and a 50 bps cut in June that lowered the repo rate to 5.5%, before holding steady at its August meeting.
Sengupta also said that India’s economy is expected to expand at a steady rate of 6.5–7% over the medium term, underpinned by resilient consumption and tax reforms, but shadowed by external risks.
“Recent policy changes, such as income tax cuts and GST rate reductions, have supported consumption, providing a positive impulse,” he said.
“On the flip side, external risks, particularly tariff-related uncertainties, remain,” he added.
Investment-led growth possible
A stronger investment cycle, Sengupta noted, could lift India’s growth potential.
As things stand, the RBI has pegged FY26 growth at 6.5%, citing state-led capital spending and a tentative rural recovery, even as forecasters diverge: the Asian Development Bank cut its outlook to 6.5% on tariff and policy risks, while the IMF lifted its forecast to 6.4% on domestic strength and improving global conditions.
“The main upside (for India’s economic growth) is if the investment rate rises toward previous peak levels, especially through private capex. Getting investment rate back to previous peak levels can boost potential growth by 0.5 percentage points, all else constant,” Sengupta said.
“On the downside, external headwinds, geopolitical risks, and tariff-related uncertainties pose the greatest challenges,” he added.
To be sure, gross fixed capital formation, a proxy for investments, slowed to 7.8% in April-June 2025 from 9.4% in the previous quarter, but still showed signs of robust growth, supported by a higher year-on-year capital expenditure by the government.
‘Centre’s Capex has reached its peak’
Central government spending has little headroom to rise further.
“The peak as a share of GDP was already reached in FY24, at about 3.2%. With fiscal consolidation underway, there’s little room to materially increase this share,” Sengupta said.
“On private capex, supply-side conditions look strong, corporate and bank balance sheets are healthy, but global uncertainty is holding back fresh investments in India as well as elsewhere. Our estimates suggest policy or tariff uncertainty can shave off nearly a percentage point from overall investment growth,” he added.
Sengupta, however, struck a confident note on household demand.
“Yes, we are optimistic. Income tax cuts partly went toward deleveraging, but they still supported demand. A strong crop cycle has boosted rural incomes, with real agricultural wages growing at over 4%,” he said.
“Add to this the GST cut, which directly lowers consumer prices and inflation, and you have a broad-based consumption uplift,” he added.
GST rate rationalisation a big positive
Sengupta highlighted the importance of structural reforms, particularly in tax.
“The shift from a multi-slab to a two-slab (GST) structure is a big positive. Streamlining processes like refunds will further improve the ease of doing business…. Stability in the tax regime will be valuable for businesses,” he added.
India’s external debt position, Sengupta said, provided “stability and policy space.”
Services exports have risen to 10% of GDP, foreign exchange reserves stand at $700 billion, and external debt is among the lowest in emerging markets, he said.
Still, foreign portfolio inflows have been cautious. “India’s tariff regime appears high compared to peers,” he said. “But with clarity on trade issues and stronger consumption, we expect inflows to return,” he added.
States should stick to credible fiscal paths
On fiscal matters, Sengupta said that the SDL (State Development Loan) issuances have already steepened the yield curve, especially in the long end.
While the Centre is likely to meet its 4.4% fiscal deficit target, states also need to anchor themselves to credible fiscal paths, he said.
“Greater market differentiation of states’ fiscal performance, reflected in spreads, would be a healthy reform,” he added.
Looking ahead, Sengupta stressed the urgency of leveraging India’s demographic advantage.
“Labour force participation has improved, especially among women. Returning LFPR to peak levels could add nearly 1 percentage point to growth. But the demographic window won’t last forever—the next 20 years are critical,” he said.
On fiscal consolidation, Sengupta added that with general government debt-to-GDP at about 85%, consolidation is essential.
“We expect the government to stick to its glide path, aiming for around 4% fiscal deficit by FY27. Having already delivered income tax and GST cuts, there’s little room for more without a windfall,” he added.
