In terms of public policies, the fiscal deficit has gradually declined since the Covid-19 years and is expected to stabilize around pre-pandemic levels in 2026 and 2027. Among other things, broadening the tax base and strengthening tax compliance will help consolidate public finances. 

After two years of keeping the policy rate constant at 6.5% (which followed +250bps of cumulative hikes in 2022-2023 to contain inflation), the Reserve Bank of India (RBI) started a series of four policy rate cuts in February 2025 (-125bps cumulative), as inflation slowed from 5% in 2024 to 2.2% in 2025.  As we expect inflation to reach the central bank’s 4% target, with 4.2% in 2026 and 4.4% in 2027, we do not forecast  further policy rate movements in 2026. 

Overall, indicators show that financing risk is low in the short-term. In the medium run, the indicators that need monitoring are (i) the current account deficit and still moderate foreign direct investment inflows; (ii) public finances, with a large fiscal deficit, and (iii) the financial sector, with vulnerabilities surrounding non-bank financial corporations. 

The current account deficit is expected to remain around -1.5% of GDP in the coming few years. Foreign direct investment inflows have been increasing but still remain relatively moderate compared to pre-pandemic levels. The upwards trend is expected to continue, provided adequate liberalizing reforms are implemented and geopolitical and commercial tensions are kept under control. Regarding public finances, the public debt-to-GDP ratio shot up with the Covid-19 crisis and seems to be stabilizing at the high level of around 80% (vs. c.70% before the pandemic). Finally, the resilience of the financial sector has somewhat improved since 2022 with private sector banks’ gross non-performing-loans ratio remaining stable around 2.5% since 2024, down from 5.9% in March 2022. However, non-bank financial corporations, subject to high concentration risks, should be closely monitored as their importance in the financial sector continues to grow, reinforcing risks of spillovers.

India’s business environment is below average in our assessment of 185 economies, with little change in recent years. The Heritage Foundation’s ‘Index of Economic Freedom’ survey in 2025 assigns India rank 128 out of 184 economies, reflecting good scores with regard to the tax burden, government spending, business and monetary freedoms though weaknesses remain in particular with regards to fiscal health, investment freedom, financial freedom, government integrity, property rights and judicial effectiveness. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicates scores since 2019 that have stagnated in the control of corruption and the rule of law and slightly improved in regulatory quality and government effectiveness (all roughly in the 45-60% percentile range). Our proprietary ‘Environmental Sustainability Index’ puts India at rank 143 out of 210 economies, continuing to improve and reflecting better performance in energy use per GDP and CO2 emissions per GDP, but weaknesses in terms of climate change vulnerability, renewable electricity output and the recycling rate.

India’s political risks remain low, as the current coalition government led by the Bharatiya Janata Party (BJP) continues to advance its policy agenda despite holding only a narrow majority since the 2024 general election. The state elections scheduled for mid-2026 will provide an indication of the BJP’s current popularity and may influence the government’s priorities before the next general election in 2029. Domestically, the governing coalition is expected to continue ongoing economic reforms, particularly those aimed at strengthening the manufacturing sector and promoting technology-driven industries. Externally, India’s relations with the US suffered multiple headwinds throughout 2025 between the impact of the trade war, tensions along the Pakistan border and sanctions on Russian oil. We expect India’s foreign policy to continue its diversification strategy, with new partnerships after recent free-trade agreements with the EU, UK, Oman and New Zealand. The international summits hosted in India in 2026, including the BRICS summit in the summer, will offer opportunities for the government to further advance its non-aligned foreign policy approach.