India’s economy remained resilient despite the external energy shock, with Q1 FY27 real GDP growth at 7.8% YoY and economic activity indicators holding firm through July-August. Given stronger-than-expected Q1 growth and continued momentum, we now forecast FY27 real GDP growth at 7.2%. Growth should remain robust through FY27, though the pace is likely to moderate later in the year due to an expected moderation in fiscal support, the potential impact of deficient monsoon rainfall and the base effect.
CPI inflation rose to a 20-month high of 4.8% in August, with food and core inflation firming. We retain our FY27 CPI inflation forecast at 5.1%, with risks tilted upward. Broadening inflation, elevated crude oil prices and tighter global monetary conditions have brought forward our expected start of RBI policy tightening to October. At the October meeting, we expect a 25-bps repo-rate hike and a shift in policy stance from neutral to withdrawal of accommodation, with cumulative repo-rate hikes of 50–75 bps over the tightening cycle. The RBI’s special swap facilities, led by FCNR(B), strengthened FX buffers but injected substantial rupee liquidity, which the RBI is absorbing through VRRRs, OMO sales, and other tools, with additional liquidity-absorption measures expected in October.
