India’s economy is entering the final stretch of FY26 amid rising uncertainty. While US tariff flip-flops continue to cloud the global outlook, fresh domestic signals have kept policymakers and investors cautious.
Growth momentum is expected to have slowed in the October-December quarter despite festive demand and goods and services tax (GST) cuts.
Slow capital expenditure by the government in Q3 amid elusive private capex, a high credit-deposit ratio, the rupee continuing to underperform among EM peers even as foreign portfolio investors have turned net buyers in equities, and manufacturing activity cooling, here are four signals from the economy this month.
Capex cut
After maintaining a high level of capital expenditure in the first half of the current financial year, benefitting from a low base, the Centre fell short in the third quarter of the financial year.
This, economists said, proved to be a drag on the Indian economy, which is expected to see a slower growth of 7.4% in Q3 compared to 8.2% in the previous quarter. The Centre’s capex declined 23.4% year-on-year in Q3 compared to a growth of 30.7% in the previous quarter.
To be sure, the decline has come against the backdrop of high capex during the same quarter last year, following a delayed spending due to Lok Sabha elections.
Nevertheless, the sharp decline is expected to prove a statistical drag on GDP growth during the quarter. Moreover, the government cut its initial capex commitment for 2025-26 and revised it down by 2.3% to ₹10.96 trillion, signalling that capex-led growth momentum may be reaching a saturation point.
Liquidity watch
Indian banks are currently facing tighter balance sheets as credit growth has pulled ahead of deposit mobilization.
The credit-deposit (CD) ratio, which had eased to 78.9% in May and June when deposit growth briefly outpaced lending, began climbing in the second half of the year.
By December, it had risen to 81.75%, as credit growth accelerated to 14.5% year-on-year, compared with 12.7% for deposits. The shift has been most visible in recent months.
While high credit-deposit ratio in itself is a worry, the biggest worry is that the credit has come mainly on the back of personal loans, which have outpaced industry loans for years now.
While industry credit nearly doubled to 13.4% in December 2025 from around 7.5% a year ago due to aggressive cuts by the Reserve Bank of India (RBI), personal loan growth remained higher at 14.4%. The high CD ratio has affected banks demand for government securities, which is keeping government bond yields high, which economists believe will prompt the RBI to go on a long pause on the policy repo rate and rely increasingly on liquidity measures to ease conditions instead.
Brief bounce
Donald Trump’s tariffs are refusing to go away even as the US Supreme Court struck down a large part in its latest ruling.
Some optimism found its way when India and the US announced the framework of an interim deal that could have provided some competitive edge to Indian exporters, with the rupee seeing a mild reprieve. However, the rupee is still struggling to find a stable ground, though it has seen better performance in the current month compared to January.
Monthly average data shows a consistent decline since June 2025, when the rupee stood at 85.94 per dollar. The currency hit a significant psychological milestone in December 2025, crossing the 90-mark, and reached a monthly average low of 90.87 in January 2026.
The India-US trade framework triggered a 0.24% recovery in February so far. However, Trump’s resolve to keep high tariffs on countries may keep the rupee under pressure. Despite the recent recovery, the rupee continues to be an underperformer against several Asian peers.
According to analysts, the currency remains vulnerable to a downward trajectory, with the persistent lack of large-scale investment pointing toward a potential slide to 93 per dollar by year-end.
Losing sheen?
After a year of robust expansion, India’s manufacturing sector showed signs of cooling in late 2025, even as it remained firmly in the growth territory. The manufacturing purchasing managers’ index (PMI) stayed above 57-mark for most of the year, peaking at 59.3 in August, supported by strong domestic stocking, GST-led demand impulses and post-tariff frontloading of exports.
Factory activity had been hitting multi-month highs, underscoring the breadth of the expansion. However, the momentum softened in November and December, with the index slipping to 56.6 and then to 55.0.
The easing reflected a thinning pipeline of new export orders, rising competitive pressures and creeping input costs in steel, chemicals and energy, which squeezed margins.
This moderation briefly allowed Thailand—riding an export-led upswing—to overtake India at the end of 2025. But, the shift proved temporary. In January, India’s PMI edged up again to 55.4, while Thailand’s PMI cooled, restoring India’s lead among EM peers.