Rates: India is expected to maintain a strong economic trajectory over the next two years, remaining one of the world’s fastest-growing large economies. According to a new outlook released on Tuesday, the country’s gross domestic product is projected to expand by 6.5 per cent in 2026, followed by a marginal moderation to 6.4 per cent in 2027, reflecting steady domestic demand and resilient macroeconomic fundamentals.

Economic Expansion Outlook Remains Firm

The growth projections underline India’s relative strength at a time when many major economies are grappling with slower expansion. Despite global uncertainties, the report indicates that India’s medium-term prospects remain intact, supported by structural reforms, investment momentum, and stable financial conditions. The marginal easing in growth after 2026 is seen as a natural recalibration rather than a sign of weakening economic health.

Inflation Expected to Gradually Normalise

Consumer price inflation is forecast to rise gradually over the coming years, suggesting a return to more typical price levels after a period of moderation. The report estimates inflation at 2.2 per cent in 2025, increasing to 3.5 per cent in 2026 and further to 4.5 per cent in 2027. This upward movement is viewed as manageable and consistent with improving economic activity rather than overheating pressures.

Monetary Policy Likely to Stay Steady

The Reserve Bank of India is expected to maintain a stable monetary policy stance through 2026 and 2027. The benchmark policy rate is projected to remain unchanged at 5.25 per cent during this period, reflecting confidence in inflation management and economic stability. The report suggests that the central bank is unlikely to make abrupt policy shifts unless faced with significant external shocks.

Government Bond Yields Seen Easing Over Time

India’s government bond market is also expected to benefit from the stable policy environment. The yield on the 10-year government bond is projected to decline gradually, easing from around 6.60 per cent in early 2026 to approximately 6.40 per cent by the end of 2027. This anticipated softening is expected to occur despite ongoing volatility in global interest rate markets.

Global Bond Markets Undergoing Adjustment

The report also reviewed recent developments in international bond markets, noting that yields in several developed economies climbed sharply last week, reaching levels not seen in decades. This movement has unsettled investors, but the bank characterised the trend as part of a broader market adjustment rather than the onset of financial stress.

Sell-Off Viewed as Normalisation, Not Crisis

According to the assessment, the recent bond sell-off should be seen as a recalibration following years of unusually low interest rates. While the pace of the adjustment may appear unsettling, the report emphasised that there are no immediate signs pointing to a systemic crisis. Strong institutional frameworks and policy credibility are expected to help markets absorb the changes.

Stability in Developed Markets Outside Japan

In developed markets other than Japan, rising yields are similarly interpreted as a return to more typical conditions. The report highlighted that effective coordination between fiscal and monetary authorities, along with sustained confidence in central banks, could help maintain stability even amid shifting global financial dynamics.

US Federal Reserve Expected to Pause Rate Decisions

Turning to the United States, the report anticipates that the Federal Reserve will hold interest rates steady at its January 27–28 policy meeting after implementing three consecutive rate cuts. This pause is expected to allow policymakers to evaluate the impact of earlier decisions while keeping a close watch on potential inflationary pressures.

US Labour Market Remains Resilient

Despite some moderation in job creation, the US labour market continues to show resilience. Unemployment remains low, and wage growth is outpacing inflation, resulting in positive real income gains for workers. These factors suggest that the US economy retains underlying strength even as growth shows signs of cooling.