India’s economic activity remained broadly resilient, although pockets of weakness emerged. Industrial production growth remained firm in Q2 FY27 despite a September moderation, while manufacturing and services PMIs recovered during the month. Agricultural risks persist following deficient monsoon rainfall. Consumption indicators held up, although early festive-season sales were mixed. Fiscal pressures persist amid slower-than-budgeted tax revenue growth and higher subsidies, with expenditure rationalisation likely later in the year as the government seeks to contain fiscal slippage. Investment indicators remained firm in Q2, but new project announcements slowed sharply.
CPI inflation rose to 5.5% in September, and price pressures broadened, with elevated crude oil prices and deficient monsoon rainfall posing upside risks. The RBI raised the repo rate by 25-bps to 5.50% and shifted its policy stance to “Calibrated Tightening” in October, consistent with our baseline expectations of cumulative rate hikes of 75-bps. The RBI announced targeted FX measures in October to support the rupee, but persistent external pressures limited its recovery. We expect a 25–50 bps repo rate hike in December, with a larger increase more likely if crude oil prices remain elevated and inflationary and/or rupee pressures intensify.
