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Informist, Tuesday, Aug. 18, 2026

 

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--India Ratings: Services PMI fell below Manufacturing PMI after W Asia war
--CONTEXT: India Ratings and Research releases India's FY27 economic outlook
--India Ratings: RBI to keep repo rate on hold in 2027
--India Ratings: Rural CPI inflation surpassed urban inflation since Jan
--India Ratings: Liquidity to be supportive of credit requirement in econ
--India Ratings: Petroleum products, gold to push inflation higher
--India Ratings: El Nino poses risk to India's inflation, GDP growth
--India Ratings: See FY27 GDP growth at 6.8% against 6.7% estimated in May
--India Ratings: Expect crude oil price to average $85/barrel in FY27
--India Ratings: See India's FY27 headline inflation to average 5%
--India Ratings: See India's GVA growth at 6.8% in FY27
--India Ratings: See India FY27 current account deficit 1.5% of GDP
--India Ratings: See Q1 GDP growth 6.9%, 10 bps lower from RBI's forecast
--India Ratings: Quarterly GDP growth to be in 6.4-6.9% range in FY27
--India Ratings: See wholesale inflation averaging 8.5% in FY27
--India Ratings: See retail inflation peaking in Oct-Dec FY27

 

NEW DELHI – Indian economy is likely to grow at a slower pace in 2026-27 (Apr-Mar) from the previous year, weighed down by the war in West Asia and El Nino conditions, according to India Ratings and Research. The rating agency estimates India's FY27 GDP growth at 6.8%, down from 7.7% in FY26, and 7.8% in the March quarter. The agency's growth projection is, however, 10 basis points higher from 6.7% it had estimated in May.

 

"The slowdown is attributed to higher fuel and food inflation stemming from the West Asia conflict's uncertainty, weak currency, and the likely impact of El Nino on agriculture," economists at India Ratings said. 

 

The rating agency has given the latest projection considering average crude oil prices at $85 per barrel for FY27, no further hike in fuel prices, and rainfall at 94% of the long-period average during August and September, translating into seasonal rainfall at 90.6% of the normal rainfall. The Indian rupee averaging at 93.98 against a dollar and capital inflows of $70 billion under the foreign currency non-resident (bank) and external commercial borrowings will also help India's FY27 growth at 6.8%, said Megha Arora and Devendra Kumar Pant, economists at India Ratings.

 

As of Aug. 13, India had mobilised capital inflows worth $56.85 billion under various schemes, according to the Reserve Bank of India. Of this, $52.30 billion has been mobilised under the foreign currency non-resident (bank) scheme and $1.74 billion under external commercial borrowings.

 

Economists at India Ratings see the country's gross value added growth at 6.8% in FY27, much lower than 7.9% a quarter ago. Some economists consider gross value added growth a more reliable indicator of economic activity than GDP.

 

For Apr-Jun, India's growth is seen at 6.9%, which is 10 basis points lower than the RBI's forecast of 7.0%. The quarterly GDP growth is estimated to be in the range of 6.4-6.9% throughout FY27, the rating agency said in its FY27 economic outlook report.

 

On the demand side, India is witnessing a moderation in the consumption pattern in the rural areas. While the consumption demand growth still remains a concern in the urban region, Arora said. "So the growth in the rural wages has been much higher compared to the growth in urban wages." The supply side is seeing risk from El Nino conditions, especially in agricultural output, and only selected segments are driving the growth in the industrial sector. Economists are hopeful of new businesses providing impetus in the services sector. With the outbreak of the war, the Services Purchasing Manager's Index has fallen below its manufacturing counterpart in the past few months, the report said.

 

INFLATION TRAJECTORY

India Ratings estimated FY27 retail inflation to average at 4.9%, with CPI inflation peaking at 5.9% in the December quarter. These projections are largely in line with the central bank's forecast. Higher prices of petroleum products, milk, and gold are expected to push inflation even higher, Arora said during a press conference. "Timing and quantum of passthrough of higher commodity prices is crucial." The central bank's forecast for the quarterly break-up is as follows--4.7% for Jul-Sept, 5.9% for Oct-Dec and 5.5% for Jan-Mar.

 

Since January, rural India is reporting a higher retail inflation than the urban areas. "This is because of the unemployment. The urban unemployment is playing a bigger role here," Arora said. It is impacting demand, which is further "impacting the inflation versus food (inflation) that had been quite strong up until now."

 

In July, CPI food inflation rose to 5.52% from 5.32% a month ago. Rural inflation rose to 4.84% last month from 4.74% in June and urban inflation inched up to 3.96% from 3.93% in June.

 

At the wholesale level, the inflation is seen significantly higher, at 8.5%, in FY27 compared with the ratings agency's earlier forecast of around 5% given in May. "El Nino also poses risk to India's inflation and GDP growth forecast," Arora said.

 

Overall, Pant said, "Higher inflation due to El Nino may limit growth upside from lower oil prices." With the onset of the war, Brent crude oil prices spiked to $122.5 per barrel in April. Last month, the oil prices moderated to sub-$72 per barrel, the pre-war level, amid the peace talks between the US and Iran. The uncertainities in the de-escalation in the war have again led the oil prices to trade at $91.33 per barrel currently.

 

FISCAL METRICS

India Ratings expect the government to meet its fiscal deficit target for FY27, which is projected at 4.3% of GDP, or INR 16.96 trillion. The fiscal deficit target for FY27 will, however, be 4.5% of GDP, based on the downward revision in India's nominal GDP in the new series with FY23 as the base year. However, Pant sees challenges arising due to subsidies on liquefied petroleum gas and fertilisers.

 

"Government intervention to protect vulnerable sections of the society (consumer as well as producers) is likely to be more in the form of credit guarantee, easy access of finance rather than direct transfers," Arora said.

 

According to the rating agency, India's current account deficit is likely to widen to 1.5% of GDP in FY27, from 0.6% of GDP. "Lower oil prices positively impact the Indian economy by reducing the trade/current account deficit. However, While direct tax collection and non-tax revenue may support achieving the fiscal deficit target, indirect tax collection may pose challenging", Pant said. In the June quarter, India's current account recorded a deficit of $3.1 billion, compared with a deficit of $2.9 billion in the corresponding period last year.

 

POLICY OUTLOOK

Given the inflation remaining within the RBI's tolerance band of 2-6% so far, economists at India Ratings expected the policy rates to be on hold at 5.25% in 2027. However, the system liquidity is likely to remain supportive of credit requirement in the economy. The central bank kept the repo rate unchanged at 5.25% since December, when it had cut interest rates by 25 basis points.

 

The RBI's swap facility for FCNR(B) deposit, effective from Jun. 8, has helped India attract foreign capital inflows. The facility, along with other measures undertaken by the RBI, is expected to maintain liquity in the system. Friday, the central bank had announced early closure of the swap facility for FCNR(B) deposit till Aug. 31, against the previous deadline of Sept. 30. However, the RBI's swap facilities for the external commercial borrowings of public-sector undertakings and offshore foreign currency borrowings of banks, offering a concessional rate of 1.5% per annum, will remain open till Dec. 31, as announced earlier, it said.  End

 

US$1 = INR 95.67

 

Reported by Shweta

Edited by Akul Nishant Akhoury

 

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