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Informist, Wednesday, May 13, 2026

 

NEW DELHI – Morgan Stanley Wednesday raised its forecast for India's GDP growth in 2026-27 (Apr-Mar) by 50 basis points to 6.7%, with domestic demand seen supporting the economy despite the concurrent impact of the war in West Asia. Economists at the bank expect that government policy will help minimise and absorb the damage to India's growth, while the Reserve Bank of India is expected to hold interest rates in FY27.

 

The bank's base case forecasts assume Brent crude oil prices averaging $87.5 per barrel in FY27. India's GDP growth for FY28 is seen at 7.0%, with oil prices seen averaging $80 per barrel. "Despite a weaker external backdrop, April activity indicators show resilience, supported by strong domestic demand," economists at Morgan Stanley said in a note. "While the ongoing conflict and higher oil prices will likely weigh on growth, we expect outcomes to exceed earlier expectations."

 

Morgan Stanley sees FY27 growth at 6.2% and FY28 growth at 6.5% if oil prices average $110 per barrel in the current financial year and $80 per barrel in FY28, respectively. In April, economists at Morgan Stanley had expected GDP growth in FY27 at 6.2% with the assumption that oil prices would average $95 per barrel.

 

India's GDP grew 7.8% in the December quarter. The government's second advance estimate has projected FY26 GDP growth at 7.6%. The Reserve Bank of India forecast FY27 GDP growth at 6.9%. The government will release the GDP data for the March quarter and provisional estimates for FY26 on Jun. 5.

 

Urban demand, government capital expenditure on infrastructure and defence, and services exports should provide offsets, according to the economists. The bank expects growth to trough in the June quarter, "reflecting the impact of the conflict, and to gradually normalise to pre-conflict levels by March 2027."

 

"Sustained high oil prices could trigger non-linear and progressively larger impacts on growth, as the burden on households and firms intensifies over time, leading to cutbacks in consumption and investment," Morgan Stanley said.

 

The bank estimates CPI inflation to average around 4.7% in FY27 from 2.1% in FY26. A rise in inflation will be "driven by higher production costs, rupee weakness, and spillovers into core inflation," the economists said. "We continue to monitor second-round effects and food inflation risks from weather and input availability." The CPI inflation estimated is above the Reserve Bank of India's medium-term target of 4% and tad above the central bank's 4.6% projection for FY27. CPI inflation in April rose to 3.48% from 3.40% in March.

 

A further rise in oil prices could also put pressure on India's external balance sheet, with the current account deficit widening by 30-35 bps of GDP, in case of a 10% rise in energy prices. This will leave India vulnerable to energy price shocks despite diversification and efficiency gains. Morgan Stanley expects the current account deficit to widen to around 1.8% of GDP in FY27.

 

On the policy side, the government is focussing on energy diplomacy and fuel supply management with higher subsidy and excise duty cuts. "The objective is for fiscal policy to act as the primary shock absorber, cushioning the adverse impact of elevated global commodity prices and supply constraints while limiting the pass-through of higher crude prices," economists at Morgan Stanley said.

 

The bank sees a potential slippage of around 0.3-0.5% of GDP from the budgeted deficit target of 4.3% in FY27 with higher subsidy requirements for fertilisers and fuel, excise duty cuts, and potential revenue shortfalls, widening the fiscal deficit.

 

The RBI's Monetary Policy Committee is likely to maintain status quo on the repo rate at 5.25% for FY27, according to Morgan Stanley, as the central bank would be balancing growth and inflation risks from the ongoing supply-chain disruptions. In the wake of the West Asia crisis, the RBI would have to rely on tighter overseas direct investment norms and steps to boost non-resident India deposits and foreign exchange inflows.

 

Going forward, Morgan Stanley sees two 25-bps rate hikes in the first half of FY28. This will take the repo rate to 5.75%, as inflation remains above 5% and growth stays resilient, the economists said. "A stronger-than-expected growth recovery could bring forward the first rate hike to QE (quarter ended) March 2027."  End

 

US$1 = INR 95.70

 

Reported by Shweta

Edited by Tanima Banerjee

 

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