Domestic consumption to cushion growth in second half of FY26: SBI Caps

New Delhi: Domestic consumption is emerging as India’s strongest buffer against global headwinds in the second half of FY26, even as a steep 50% tariff imposed by the US weighs on external demand, SBI Capital Markets (SBI Caps) said in a report on Friday.

India is pivoting to domestic growth levers as the Centre and states ramp up capex and goods and services tax (GST) rate cuts fuel record festive consumption, the investment banking and project advisory arm of State Bank of India (SBI) said in its latest October edition of Ecocapsule, a monthly report on the economy.

“After months of uncertainty, US tariffs now appear set to stay — with evolving country and product coverage — though their full economic impact is still unfolding,” the report said. “Inflationary pressures have been shared largely by exporters and retailers, with consumers now beginning to feel the pinch,” it added.

In August, US President Donald Trump slapped an additional 25% tariff on a large number of Indian goods over New Delhi’s oil imports from Russia, following a similar levy in April aimed at narrowing trade imbalances.

The move has hit India’s export sector, especially textiles, leather, and gems and jewellery, with shipments to the US falling 11.9% annually in September to $6.02 billion.

Adding to the strain, Washington has hiked the one-time H-1B visa fee from $1,000 to $100,000, unsettling India’s IT services industry.

The US is India’s largest export market, accounting for about 2% of GDP.

“As tariff effects percolate through the economy, their long-term structural impact may be locked in before fully visible,” SBI Caps said.

The report said the global landscape remains unsettled, with US tariffs now entrenched as the new normal and their disruptive effects still unfolding.

Credit flow

The report noted that the Reserve Bank of India (RBI) has ushered in a new wave of deregulation to boost credit flow to productive sectors.

A draft proposal aims to remove sectoral caps on lending to large borrowers, lift curbs on acquisition finance, and raise limits on loans against real estate investment trust (REIT) and infrastructure investment trusts (InvIT) units, while streamlining Basel III risk weights to create more headroom for banks.

“Streamlining of risk weights for Basel III capital and a very gradual glide path towards ECL norms implementation also provides wiggle room,” the report said.

“As a good omen in light of these auspicious developments, the C/D (credit-deposit) ratio exceeded 80% for the first time in FY26 for the fortnight ended 19 September ’25,” it added.

The credit-deposit ratio measures how much of a bank’s deposits are lent out as loans. A higher ratio signals strong credit demand but greater liquidity risk, while a lower ratio indicates cautious lending or weak credit growth.

Markets resilient

The report said Indian equity markets have stayed resilient despite heavy foreign investor outflows. With net FPI equity withdrawals of $18 billion so far this year, domestic investors have absorbed large issuances, driving what could be a record month for primary market activity in October, it said.

“Plainly, domestic investors have shown a voracious appetite to mop up large issuances and reposed their faith in the markets even when foreign investors have stumbled. We expect primary market issuance in FY26 to be similar to FY25 levels,” it added.

Amid global turbulence, SBI Caps said India’s multi-pronged strategy, spanning public capex, consumption support, and principle-based credit reforms, aims to anchor growth through shifting trade and monetary conditions.

“The message is – control the controllables and the uncontrollable shall become controllable,” it added.