IMF Lifts Global Growth Outlook, Warns of Trade and Debt Risks

The International Monetary Fund (IMF) on Tuesday slightly raised its global growth outlook, citing resilience in major economies, though it cautioned that the recovery remains fragile amid ongoing policy uncertainty and rising trade tensions. The IMF warned that any renewed escalation in U.S. tariffs after August 1 could drag down global output, further exposing vulnerabilities in the current economic rebound.

In its July update to the World Economic Outlook (WEO), the IMF projected global GDP to grow by 3% in 2025 and 3.1% in 2026—marking a 0.2 and 0.1 percentage point increase, respectively, from its April forecast.

India’s growth prospects also saw an upward revision. The IMF raised its FY26 growth forecast for the country to 6.4%, up from the earlier estimate of 6.2%, and projected the same growth rate for FY27. The revision reflects sustained domestic momentum and a more favourable global environment. Meanwhile, the IMF retained its FY25 growth estimate for India at 6.5%, highlighting the economy’s continued resilience in the face of global challenges.

The forecast comes against the backdrop of ongoing global trade turmoil triggered by former U.S. President Donald Trump's sweeping tariff measures, which targeted both allies and adversaries, igniting trade wars and prompting a series of hurried negotiations.

“In India, growth is projected at 6.4% for both 2025-26 (FY26) and 2026-27 (FY27), with slight upward revisions driven by a more favourable external environment compared to the assumptions in the April forecast,” the IMF noted.

Earlier in February 2025, the Reserve Bank of India had estimated GDP growth for FY26 at 6.7%, supported by strong household spending, a rebound in industrial activity, and improving rural demand. However, mounting trade risks and rising tariff uncertainties led the central bank to scale back its forecast to 6.5% in April. Both Moody’s Ratings and S&P Global have since aligned with this revised outlook, projecting FY26 growth at 6.5%.

In the Economic Survey for FY25, the Union finance ministry projected GDP growth for FY26 in the range of 6.3% to 6.8%, signalling cautious optimism amid persistent global headwinds and a steady domestic recovery. Meanwhile, the Asian Development Bank (ADB) revised its FY26 forecast downward to 6.5% from 6.7%, citing concerns over escalating U.S. tariffs and heightened trade risks.

Speaking to reporters following the release of the IMF’s update, Chief Economist Pierre-Olivier Gourinchas warned of growing threats from intensifying trade tensions. He cautioned that if the current tariff pause expires without resolution on 1 August, a sharp increase in duties could follow, potentially reducing global output by 0.3% in 2026.

Gourinchas noted that ongoing trade uncertainty is weighing on investment sentiment, while a fragile geopolitical landscape raises the risk of renewed supply chain disruptions. He further cautioned that high levels of debt and fiscal deficits, along with growing threats to central bank independence, are exacerbating economic vulnerabilities.

A better-than-normal monsoon is helping to cool food inflation, contributing to a sharp decline in headline consumer price inflation (CPI), which fell to a 77-month low of 2.10% in June. The drop was largely driven by a steep fall in vegetable prices and a favourable base effect.

Food inflation turned negative, while core inflation has remained sticky around 4.4%.

With inflation easing and growth now taking centre stage, the Reserve Bank of India has shifted to an accommodative monetary policy stance. It has lowered the repo rate by a cumulative 100 basis points in 2025, from 6.50% to 5.50%, through three consecutive rate cuts. The easing cycle began with a 25 bps cut in February, followed by another in April, and a sharper 50 bps reduction in June, reinforcing a pro-growth monetary environment.

On the fiscal side, further stimulus could be on the cards in the second half of the year. Expectations are rising around possible tweaks to the Goods and Services Tax (GST), income tax relief measures, and other supportive policy steps aimed at reviving consumption and spurring private investment.

Globally, improved financial conditions and enhanced policy support have led the IMF to revise growth projections upward for major economies. The United States is now expected to grow by 1.9% in 2025 and 2% in 2026, while China’s forecast has been raised significantly to 4.8% and 4.2%, respectively. The Euro Area is projected to expand by 1% in 2025 and 1.2% in 2026.

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