Global financial services major Morgan Stanley on Wednesday upgraded its GDP growth forecast for India at 6.2 per cent in FY26 and 6.5 per cent for FY27, saying that domestic demand trends will be the key driver of the country's growth momentum amid lingering uncertainty on the external front.

The earlier growth forecast was 6.1 per cent for FY26 and 6.3 per cent for FY27.

“We expect growth to remain resilient, supported by strength in domestic demand amidst uncertainty from external factors,” said the global brokerage in its note.

“Policy support is likely to continue through easier monetary policy while fiscal policy prioritises capex. Macro stability expected to be in comfort zone with robust buffers,” it added.

Within domestic demand, the brokerage expects consumption recovery to become more broad-based with urban demand improving and rural consumption levels already robust.

“Within investments, we see public and household capex driving growth while we expect private corporate capex to recover gradually,” it noted.

Morgan Stanley expects headline inflation to remain benign thanks to lower food inflation and the range-bound trend in core inflation.

The IMD's forecast of an above-normal monsoon for 2025 is likely to support the cropping season, which, in addition to helping to build healthy buffer stocks, is likely to ensure that food prices remain benign, according to the note.

“As such, we expect inflation to remain decisively below the 4 per cent mark over the next few months and average 4 per cent (on-year) in F2026 and 4.1 per cent in F2027,” the note read.

It also expects the RBI to respond with a deeper easing cycle, premised on slower growth, while inflation remains under control.

“As such, we pencil in a cumulative easing of 100bps, with two more rate cuts of 25bps each in this rate easing cycle,” said the brokerage.

Moreover, it expects the RBI to continue easing across its other levers of liquidity and regulations.

“On the fiscal policy front, we expect the consolidation path laid down in the Budget to be maintained in our base case with a focus on pushing capex,” the note said.

The risks to growth outlook remain evenly balanced, amidst an improving outlook for cross-country trade deals. On the upside, an acceleration in US growth, along with faster resolution of trade and tariff-related uncertainty, could improve investor sentiment and the capex cycle.