India's GDP Growth Slows to 6.5% in Q2 Amid Monsoon Disruptions

Growth Moderates but Remains Among World's Fastest

India's gross domestic product expanded 6.5% year-over-year in the July-September quarter of fiscal year 2026, down from a revised 7.1% in the preceding three months, according to data released by the Ministry of Statistics on October 15. The slowdown, while anticipated, brought growth to its weakest pace in five quarters.

Erratic monsoon rainfall across central and western India reduced kharif crop yields by an estimated 9%, dragging agricultural GDP growth to 1.8% from 3.5% in the prior quarter. Rural consumption indicators, including two-wheeler sales and fast-moving consumer goods volumes, also softened.

Manufacturing and Services Hold Firm

The manufacturing sector grew 7.2%, supported by robust automobile production and electronics assembly. India's smartphone manufacturing output has more than doubled since 2023, driven by production-linked incentives that attracted investments from Apple suppliers Foxconn and Pegatron.

Services, which account for roughly 55% of GDP, expanded 7.8%. Financial services and information technology led the segment, with companies such as Tata Consultancy Services and Infosys reporting strong order books in their latest quarterly results.

Central Bank Holds Rates Steady

The Reserve Bank of India held its benchmark repurchase rate at 6.25% at its October policy meeting, citing the need to monitor food-price inflation, which accelerated to 8.4% in September. Governor Sanjay Malhotra told reporters the central bank would "look through" the supply-side price spike and reassess conditions in December.

Economists at Goldman Sachs maintained their full-year growth forecast of 6.8% for FY2026, noting that government capital expenditure, budgeted at 11.1 trillion rupees ($132 billion), was running ahead of schedule and would support activity in the second half.

Investment Momentum Continues

Gross fixed capital formation rose 8.3%, the fastest pace in three quarters, reflecting accelerated infrastructure spending. The National Highways Authority of India awarded contracts for 4,200 kilometers of new roads during the quarter, up from 3,100 kilometers a year earlier.

Foreign direct investment inflows totaled $16.4 billion in the quarter, with the bulk directed toward semiconductors, renewable energy, and data centers. The Gujarat semiconductor fabrication plant being built by the Tata Group and Taiwan's Powerchip is on track for commissioning in late 2027.

Fiscal Outlook

The central government's fiscal deficit stood at 38% of the full-year target through September, slightly below the 40% recorded at the same point last year. Tax revenue collections grew 12.6%, led by strong goods and services tax receipts.

Analysts are watching the December quarter closely. A recovery in agricultural output, combined with festive-season consumer spending and continued public investment, could push full-year growth back toward the 7% mark that Prime Minister Narendra Modi's government has targeted.