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Informist, Thursday, Jun. 4, 2026

 

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--Fitch Zook: See risks of fiscal slippage in India in FY27
--Fitch Zook:India govt finances to see significant hit if Iran war drags on
--CONTEXT: Comments by Fitch Ratings Senior Director Zook in an interview
--Fitch Zook: See downside risk to India FY27 GDP growth forecast of 6.7%
--Fitch Zook:See India fiscal policy shielding consumers from oil price shock
--Fitch Zook: West Asia war to impact industry, private investment in India
--Fitch Zook: Consumption to drive India growth in FY27 despite challenges
--Fitch Zook: Energy price rise impact to remain on India inflation in FY27
--Fitch Zook: Expect India CPI inflation to stay between 5% and 6% in FY27
--Fitch Zook: See chances of interest rate hikes in India in Oct-Mar
--Fitch Zook: Rupee unlikely to be key consideration for RBI for rate hike
 

 

By Shubham Rana and Priyasmita Dutta

 

NEW DELHI – The Indian government is likely to see fiscal slippage in the current financial year because of the impact of the war in West Asia, according to Fitch Ratings. And if the war continues throughout the year, government finances may see a "significant hit", Jeremy Zook, senior director at Fitch, said.

 

"We do see some growing risk that the deficit will come in a bit higher than where the government put it in the Budget but modestly so and not a large slippage unless this crisis (the West Asia war) really drags on for the full year," Zook told Informist in an interview. "And then, you might see a more significant hit on the public finance side."

 

The Union Budget pegged the government's fiscal deficit in FY27 at 4.3% of GDP, but the government now sees it at 4.5% of GDP, following a downward revision in the size of GDP for earlier years under the new series of data. In absolute terms, the government has projected the fiscal deficit for FY27 at INR 16.958 trillion, 21.4% of which was met in April alone.

 

The US-Israel war on Iran, now in its fourth month, has put pressure on the Indian government's finances. The government has already lowered excise duty on petrol and diesel to shield domestic consumers and help cut losses for oil marketing companies. The Centre is also staring at a higher-than-budgeted expenditure on fertiliser subsidies this year.

 

Fiscal slippage would hurt India's chances of a rating upgrade. Fitch currently has a 'BBB-' rating on India with a stable outlook. India has made progress in a lot of credit metrics on the fiscal front and the growth front, Zook said. "I think this current shock is hitting India quite hard and we haven't yet seen a full resolution of the shock itself, so there's a lot of uncertainty and I think that uncertainty kind of clouds some of that positive momentum that we've been seeing in the rating," the analyst said. 

 

Zook expects the fiscal policy to continue shielding consumers from the oil price shock. Based on the measures implemented by the government so far, and expectations that the Strait of Hormuz will reopen in July, Fitch estimates the fiscal hit at around 0.5% of GDP. But this entire hit is unlikely to be reflected in the fiscal deficit, Zook said.

 

"There are likely to be some offsets that the government will implement. It just depends how large those offsets are as to how much slippage there will be this year," Zook said. The government may also look at reducing capital expenditure to meet its fiscal deficit target, Zook added.

 

The fiscal deficit target may also be helped by a higher GDP deflator, with inflation expected to rise because of the impact of the war, Zook said. While inflation is not seen rising to the "degree that we saw back in 2022-23 but it will still be there and that will likely help to bring down the debt ratio this year just because nominal growth will be relatively high on that basis," the analyst said.

 

MACROECONOMIC RISKS

Fitch, which had in March raised India's FY27 GDP growth forecast to 6.7%, sees downside risks to economic activity from the oil price shock, Zook said. "Our expectation is that this is not a supply shock. There won't be prolonged shortages of fuel, it will end up being just more of a price effect where that has its negative impact on GDP growth," Zook said.

 

Fitch's FY27 GDP growth forecast, expected to be revised this month, is lower than the Reserve Bank of India's projection of 6.9% growth.

 

Zook said the West Asia war will impact the industry and private investment in India. Consumption is also likely to be affected this year, but will remain the primary growth driver in FY27, Zook said.

 

Inflation is also expected to rise in FY27 because of the energy price shock, Zook said, adding that inflation is likely to rise above 5% but stay below 6%, the upper end of the RBI's tolerance band.

 

"I think the bigger impact would be from the second-round impacts of higher fuel prices, which will feed into higher transportation costs," Zook said. "The other impact will certainly be on the food side. A more prolonged closure (of the Strait of Hormuz) and you see more difficulties in getting fertiliser supplies, that would have a more severe impact, and certainly the inflationary impact of that could be quite significant in that downside scenario," the analyst said.

 

Zook expects more retail fuel price hikes, but these would be "relatively modest in terms of the overall increase, compared to other countries around the world." So far, oil marketing companies have raised petrol and diesel prices by around INR 7.5 per litre, half of what the market had expected.

 

With inflation set to rise, the rating agency sees chances of interest rate hikes in India in the second half of FY27. Zook expects the RBI's Monetary Policy Committee to raise interest rates by 25 bps between October and March, and then assess how temporary or permanent the inflationary shock persists.

 

"I think the RBI will take some time to assess the second-round effects of higher energy prices on inflation and how durable they see those second-round effects," he said. "If they see those second-round effects as somewhat temporary and something that they can look through, that would likely lead them to lean a bit more towards helping to support growth in this current environment and would argue for less in the way of rate hikes."

 

Even as Fitch expects a rate hike in FY27, it is unlikely to be from the perspective of protecting the rupee, which is down over 6% against the dollar in 2026.

 

"I don't think the exchange rate in the RBI's consideration would be the key factor for a policy rate hike," Zook said. "I think it would still be very much focused on inflation, but the exchange rate side of things would likely be in the back of their minds as they think about monetary policy going forward."  End

 

US$1 = INR 95.79

 

Edited by Avishek Dutta

 

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