Geopolitical risks have moderated following the US-Iran interim peace agreement, though the agreement’s durability, ongoing regional tensions, and the pace of energy supplies normalisation remain key uncertainties. We retain our FY27 real GDP growth forecast at 6.7%, while revising our CPI inflation forecast upward to 5.1% from 4.7%, reflecting higher retail fuel prices, broadening inflationary pressures, and monsoon-related risks.
High-frequency indicators point to resilience in early FY27, but the agricultural outlook has emerged as a key domestic risk. The IMD has projected southwest monsoon rainfall at 90% of the long-period average amid El Niño conditions, with cumulative rainfall ~43% below normal as of June 28. Private consumption faces emerging pressures as labour market conditions, real wages, and consumer confidence have softened.
CPI inflation rose to a 16-month high of 3.9% in May, with elevated WPI inflation signalling pipeline pressures that have yet to reach retail prices. The RBI kept the policy repo rate unchanged at 5.25% in June, while maintaining a neutral stance and announcing measures to attract foreign capital inflows. We expect the RBI to remain on hold in August, although cumulative rate hikes of 50-75 bps in H2 FY27 remain on the table if supply-side pressures persist or the monsoon disappoints. A faster normalisation in energy markets and a better-than-expected monsoon could, however, reduce or even eliminate the need for policy tightening.
