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Informist, Monday, Sept. 28, 2026

 

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--OECD Schwellnus: See 7.8% GDP growth for India in Q1 as peak for FY27
--CONTEXT: OECD Economist Cyrilee Schwellnus in interview with Informist 
--OECD Schwellnus: Expect some weakening in econ activity until December
--OECD Schwellnus:India inflation has not broadened out of food, fuel so far
--OECD Schwellnus:Not too concerned about inflation becoming very entrenched
--OECD Schwellnus: Core inflation, sans precious metals, not up dramatically
--OECD Schwellnus:W Asia war impact on core CPI, sans precious metals, benign
--OECD Schwellnus: Expect RBI to hike repo rate by 25 bps in December qtr
--OECD Schwellnus: See enough room for government to reallocate spending
--OECD Schwellnus: India will be able to stick to its FY27 fiscal targets
 

 

By Shweta and Pratiksha

 

NEW DELHI – Consumer price inflation in India has "not broadened" out of energy and food items so far and the Organisation for Economic Co-operation and Development is not concerned about prices becoming "well entrenched", Cyrille Schwellnus, an economist at the organisation, said. "...Up to now, super core inflation (core inflation excluding precious metals), has not really increased dramatically. So, we are not too concerned yet about inflation becoming very entrenched," Schwellnus told Informist in an interview. "But this is, of course, a risk going forward." 

 

OECD expects India's headline inflation to average 4.7% in 2026-27 (Apr-Mar). Headline inflation has remained well within the Reserve Bank of India's tolerance band of 2–6% in the last six months. Retail inflation rose to 4.82% in August from 3.21% in February, the month during which the war broke out between the US and Iran. Core inflation, which excludes food and fuel, was at 4.2% in August, whereas core inflation excluding precious metals was at 3.8% last month. According to OECD's projection, headline inflation is likely to move close to 6% at the end of the year.

 

OECD expects the Reserve Bank of India's Monetary Policy Committee to deliver a "temporary 25 basis points interest rate hike" in the December quarter, Schwellnus said. However, in case inflation becomes more generally entrenched, the central bank's rate-setting panel may hike rates by more than 25 bps. "Inflation has not really become very well entrenched," he said. "But once a sufficient number of CPI items are growing by more than 4%, then that would be a signal for the RBI to move."   

 

On Wednesday, the Paris-headquartered organisation raised its outlook for India's growth in FY27 by 80 basis points to 7.1% on the back of resilient domestic demand and supportive government measures. "We were expecting weakening of private consumption due to high inflation, due to the energy price shock," Schwellnus said. "Government policies muted the effect of global energy prices on domestic energy prices. So, the private consumption was relatively strong and also investment was very, very strong."

 

The economist also discussed a range of issues, including the impact of the US' Russia sanctions act, the government's fiscal consolidation efforts, and capital inflows. Below are edited excerpts of the interview:

 

Q. You've forecast India's FY27 GDP growth at 7.1% on strong domestic demand and government policies. What exactly do you think is driving India's resilient demand amid the global challenges?

A. The first quarter of the fiscal year came out significantly higher than we expected. That is very reassuring for the Indian economy. We see very strong domestic demand and it is really across all categories. Private consumption was actually stronger than expected.

 

We were expecting weakening of private consumption due to high inflation, due to the energy price shock. Government policies muted the effect of global energy prices on domestic energy prices. Private consumption was relatively strong and investment was very, very strong.

 

Underlying domestic demand has been very strong. On top of that, exports have continued to grow at a very high rate as well. Overall, the Indian economy probably went into this energy shock with greater strength than we thought. Although we expect some slowing in the second half of the calendar year, until December, due to some pass-through of high energy prices and some weakening of domestic demand, we still think India will be one of the fastest growing major economies in the world.

 

Q. Would you say that the 7.8% growth seen in Q1 was the highest this year or are we going to see a much higher print going ahead?

A. Yes. I think that is the peak for this fiscal year. We expect some weakening in activity in the quarter ending in September and in the quarter ending in December. And from then on, we are going to see a very gradual recovery.

 

Q. Do you see any downside risk to your growth projection?

A. Indeed, the main downside risk to the projection is oil prices staying higher for longer than currently assumed. What we currently assume is that oil prices follow the future curve, and that implies a price of $105 per barrel in the December quarter. And then, they will gradually decline to average $85 per barrel in 2027.

 

There is, of course, a lot of uncertainty around this. If the war drags on and prices stay higher for longer, then both the global economy and India would grow at a significantly lower rate. India now faces some higher US tariffs, and there are threats and risks of even higher tariffs going forward. In such a global boom and gloom scenario, global growth would be at 0.7% lower rates and that would also have an impact on India.

 

Q. Do you think similar kind of growth reduction would be there for India as well?

A. We have not really quantified it for India. But one thing is clear – that India is not completely isolated from the world. If global growth falls, then external demand will also fall. That will have an impact on India.

 

And it might also be that if energy prices stay high for very long, that might have a larger impact on India than on some other economies and on the world on average, because India is very dependent on imported oil. It is hard to say whether it would be bigger or smaller than 0.7%. But it would be a fairly significant impact on India. 

 

Q. The US recently passed a bill that authorises the president to impose 100% tariffs on India. How much of an impact do you think that can have on India's fiscal math as well as overall economy?

A. It is not only that there will be a direct effect on India if there's higher tariffs, what we already see is there might be effects just from the uncertainty about trade policy. Not knowing what the tariffs will be over the next year means that investment could be delayed.

 

We already see trade policy as a downside factor currently, and then, on top of that, there might be an additional negative effect if these high tariffs actually come into effect. But we haven't quantified this.

 

Q. With the kind of revenue pressure that the government has had to bear because of the war, do you think India will be able to stick to its fiscal deficit and debt-to-GDP target for FY27?

A. Yes, there's enough room to reallocate spending. Actually, revenue growth has been relatively strong. There's enough room to stick to the fiscal targets. Of course, there would be room to better allocate spending. A lot of the additional spending that we see to cushion the impact of the energy shocks is something we would call energy subsidies that can be - lower excise taxes on some fuels, direct subsidies. And here, there would actually be significant room to reduce expenditure to make it more targeted on those who really need it rather than having very broad measures. But overall, the fiscal targets are achievable.

 

Q. You've said India may raise rates temporarily to deal with inflationary pressures. How many rate hikes do you expect and by when? Do you think there is all the more a case for a rate hike by the RBI now that the Fed has also begun policy tightening? 

A. Our interest rate assumptions for India already take into account what the Fed is doing as well. We currently expect one increase in interest rates during the fourth quarter of the calendar year. That would be a temporary increase, which would be reverted sometime in calendar year 2027.

 

Our baseline is inflation will average 4.7% in FY27, but there are large upside risks. There are risks that food inflation might increase even more because monsoon might be relatively weak this year. There might be higher inflation if energy prices are higher than our current assumption. In that case, it might be that the RBI needs to raise interest rates by even more to keep inflation expectations anchored and to prevent inflation from becoming more broad-based.

 

However, this is not something we've seen up to now. Up to now, it is relatively benign. For the time being, we just expect one single temporary rate increase. Risks are to the upside.

 

Q. Is there any quantum in mind on that temporary rate increase?

A. Currently, we assume a 25-bps increase.

 

Q. 4.7% is the average that you're looking for inflation in FY27. What is the threshold you're looking at for India to not have just one rate hike but maybe have more of that? What is the worst case scenario for that?

A. It is not really the average inflation rate that will determine what the RBI is going to do. Where we see the main pressure for increasing rates is in the second half of 2026.

 

The RBI will look at not only headline inflation. In our projections implicitly, we see inflation close to 6% at the end of the year. This will be one factor the RBI will look at. They will also be very focused on looking at whether headline inflation actually moves into categories outside food and energy. And up to now, about 70% of items in the CPI are growing at less than 4%.

 

Inflation has not really become very well entrenched. Once a sufficient number of CPI items are growing by more than 4%, then that would be a signal for the RBI to move. They will also look at inflation expectations.

 

Inflation expectations are still well anchored. But there is a risk when inflation increases and stays high for several months, then inflation expectations also increase. As the inflation shock becomes less a relative price shock and becomes much more generally entrenched, then we think there is a risk that the RBI might hike rates by more than 25 bps.

 

Q. You said that food and energy prices are quite volatile. How much will that impact the rate hike decision?

A. We think tracking core (inflation) is very important to understand inflation going forward. The reason being that food prices and energy are very volatile. They go up, they go down, and you cannot do much about it as a central bank. But once these relative price shocks move into services inflation, then you probably have to do something about it to avoid becoming very entrenched.

 

We are tracking core inflation and our projection is reported (at 4.1% in FY27 and FY28). Internally, we also track core inflation, excluding gold. We see that a good part of core inflation is still driven by gold or precious metals.

 

Core inflation, the last estimate, excluding gold and precious metals, is actually 2.9%, according to our calculations. Up to now, super core inflation (core inflation excluding precious metals), has not really increased dramatically. So, we are not too concerned yet about inflation becoming very entrenched. But this is, of course, a risk going forward.

 

Q. Can we say that the impact of war is not seen in super core inflation?

A. Yes. The impact of the war on core inflation, I would not say there is nothing, but it is still very benign.

 

Q. Can we say that inflation has not broadened as of now?

A. I would agree, it has not broadened out of energy and food. But that is a risk going forward. This is something we are monitoring actively.

 

Q. What is your outlook for the Indian currency, considering the war has dragged on and RBI has taken a lot of measures to attract inflows.

A. We've seen a lot of non-interest rate moves by the RBI, which have been fairly successful. RBI has managed to attract a lot of foreign currency inflows. It now has a lot of ammunition to combat volatility in the exchange rate going forward.

 

However, for India, we currently assume a relatively small increase in the policy rate over the next quarters. And implicitly, we assume a large interest rate increase for the Fed in the US. There is a risk that this interest differential becomes smaller because there is a negative interest differential. That might lead to capital outflows and put some pressure on the currency.

 

Q. With the artificial intelligence play happening across the globe and bond yields rising as well, what do you think is the outlook for capital inflows into India?

A. I would distinguish between portfolio capital inflows, which to a large extent are going to be driven by interest rate differentials. There is some risk if the interest rate differential narrows, that portfolio inflows might slow.

 

The other part of capital inflows is FDI. In terms of the outlook for FDI, there are some encouraging signs. There has been very strong domestic investment over the past year. To some extent, this is driven not only by public investment, but also by private investment and in part also related to AI to a lesser extent than in some other Asian economies. But AI investment is picking up.

 

India still has a lot to do to actually make FDI more attractive for foreign investors. And one thing which we would recommend is to really streamline procedures for FDI. There is still a lot to be done to reduce administrative procedures and regulation around FDI.

 

Q. The West Asia war has yet again exposed India's vulnerability on the energy dependency front. What is the structural change we need so that another such crisis does not let us get exposed again?

A. Moving to renewable energy sources is one way to become more resilient in the face of this type of fossil fuel energy shocks. Accelerating the transition to wind and solar and other energy sources is one way to reduce the exposure.

 

We would not advocate relying on just one energy source. Being too dependent on oil, being too dependent on gas is a problem. Diversifying energy sources is important, but it is also important to diversify geographically the sources of your imports so that you can switch quickly to a different geographical source whenever one source becomes impeded.  End

 

US$1 = INR 95.98

 

Edited by Avishek Dutta

 

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