India In Goldilocks Phase Of High Growth, Economists Urge Neutral Policy Path

New Delhi: India appears to be in a Goldilocks phase of high growth and low inflation, a report said on Tuesday, with economists urging a shift towards a near‑neutral policy. 

The report from HSBC Global Investment Research said that a near‑neutral policy, combining fiscal restraint with continued monetary ease, would best support markets and the broader economy in 2026.

“A combination of tight fiscal and easy monetary policy which creates a better economic balance should be positive for all asset classes,” it said.

The research firm, however cautioned that underlying weaknesses such as insufficient corporate investment and foreign inflows must be carefully addressed.

Bond markets have already priced higher state borrowing for early 2026, and that RBI bond purchases, fiscal prudence in the budget and potential global bond‑index inclusion could attract foreign inflows, the report said.

The report further stated that equities may gain from recent reform momentum, rising nominal GDP and more reasonable valuations, and cautioned that durable gains require structural reforms to boost corporate capex and foreign investment.

Pranjul Bhandari, Chief India Economist and Strategist, argued that the research firm’s estimate suggests inflation will remain just under the 4 per cent target next year, removing pressure on the Reserve Bank of India to tighten and leaving room for further easing if growth softens.

“In fact, there is space for further easing if growth dips. And this is where we are polar opposite of what markets are currently expecting (tight monetary policy, loose fiscal policy),” Bhandari noted.

There is a lot going on globally that impacts Indian markets, such as news on tariffs and bond index inclusion, and steepening DM yield curves, she added.

The central government aims to lower public debt ratios to pre-pandemic levels by FY31, which will require continued fiscal consolidation over the next five years.

The report highlighted that such consolidation at the central level could restore balance and be offset by privatisation to limit growth drag.

Public debt ratios are expected to rise in several states despite the 3 per cent fiscal ceiling which will keep deficits in check, the report said.