India’s economy appears to have weathered the global supply shock better than initially feared. Q1 FY27 real GDP growth is expected at around 7.4%, down from 7.8% in the previous quarter, creating an upside bias to our FY27 real GDP growth forecast of 6.7%. Industrial output picked up in Q1 and remained robust in July, although the Manufacturing PMI signals softer momentum ahead. Services indicators were mixed, with formal services activity moderating and the Services PMI falling sharply in July, even as select high-frequency segments remained resilient. Downside risks to the agricultural outlook have eased as rainfall and the kharif sowing deficit narrowed, but uneven rainfall, below-normal reservoir levels and lagging sowing still pose risks to rural incomes and food inflation. Private consumption held up, but underlying labour-market weakness and inflation remain key constraints. With CPI inflation above the RBI’s 4% target, price pressures broadening and household inflation expectations remaining sticky, the case for monetary policy tightening has strengthened. We continue to expect cumulative policy repo rate hikes of 50–75 bps over the upcoming tightening cycle, likely beginning in December 2026 or February 2027 and potentially extending into FY28, while not ruling out policy action as early as October if inflation pressures broaden more quickly.
