India's macroeconomic landscape is looking positive despite ongoing global uncertainties. According to the India Economic Outlook 2026 report released by Axis Bank Research, policy rates are currently at their lowest possible levels in this economic cycle. This suggests that bond yields are expected to decrease further, and the country's external balance remains stable.
Interest Rates and Bond Yields
The report indicates that while India’s policy rates appear to have reached their lowest point, the yields on 10-year government securities (G-Sec) may still decline. This trend can be attributed to subdued inflation pressures and a need for better monetary transmission within the economy. Although the Reserve Bank of India (RBI) has limited capacity for further rate reductions, the report anticipates that implementing supply-side initiatives—such as issuing more Treasury bills and shorter-duration bonds—could help flatten the yield curve. It forecasts that the yields on 10-year bonds may drift down towards 6% by the fiscal year 2027 (FY27). The excessive extension of durations in government borrowing has kept long-term yields high, suggesting that a recalibration could lead to lower borrowing costs across the economy.
Stable External Front
On the external front, the report emphasizes that India’s external balance remains stable. The recent depreciation of the Indian Rupee (INR) against the US Dollar (USD) has made the real effective exchange rate (REER) competitive. The document states, "We do not see an unduly stressed Balance-of-Payments," as influences such as increased gold imports and a recovering non-oil deficit are counterbalanced by declining oil prices and a robust services surplus. It predicts that the current account deficit will only widen slightly to approximately 1.2-1.3% of GDP in FY26 and FY27.
Services Exports Provide Key Support
A significant factor bolstering India's external balance is its thriving services sector. The report highlights that "growth in services exports remains strong, compensating for primary income outflows." In fact, data from September 2025 shows that India’s services exports grew by 13% year-over-year, alleviating fears about potential obstacles arising from changes in US policies. Additionally, in the June 2025 quarter, modern services recorded a remarkable growth of 22% year-over-year, which has been crucial in maintaining a healthy services surplus to keep the current account deficit in check and support overall GDP growth.
Capital Flows to Stabilise
After a year of volatility, capital flows into India are expected to stabilize. The report notes that capital outflows are nearing a cyclical low and are likely to improve in FY27. These outflows have primarily been driven by global shifts towards AI-related investments and adjustments in benchmark indices, rather than inherent structural issues within the Indian market. As corporate earnings stabilize and benchmark weights recover, there is an expectation that passive inflows will start to return.
Rupee Outlook
Regarding the future of the rupee, the report suggests that a mild depreciation—not a drastic one—is the most likely scenario moving forward. The RBI has allowed for more flexibility in currency management following past interventions, and the report anticipates a gradual adjustment process. It projects that the rupee will reach around 90 USD by June 2026 and further weaken to about 92 USD by June 2027. Moreover, a weaker REER and ongoing reforms are expected to encourage new capital inflows over time, thereby reducing the risk of chaotic depreciation.
In conclusion, the report asserts that India’s macroeconomic fundamentals remain solid. They are underpinned by stable policy measures, vigorous services exports, and improved dynamics of capital flows, even as the country faces global challenges.
