Strong Growth and Inflation Concerns Shape India’s FY27 Outlook

India’s economic growth is expected to average 7.3 per cent in FY27, supported by resilient domestic demand and stronger capital inflows, while inflation is likely to remain a key consideration for monetary policy, according to Radhika Rao, Senior Economist and Executive Director at DBS Bank.

India began FY27 on a strong footing, with GDP growth reaching 7.8 per cent year-on-year in the first quarter, supported by domestic demand, consumption, public capital expenditure and manufacturing activity.

Rao said high-frequency indicators, including GST collections, e-way bills, electricity demand and digital payments, have remained resilient.

However, she expects growth momentum to moderate during the second half of FY27 as tighter financial conditions, elevated energy prices and base effects weigh on economic activity.

Inflation is also emerging as an area of concern. Consumer inflation rose to 4.8 per cent in August, with price pressures visible across several food categories, including sugar, milk, protein-rich products and edible oils. Higher energy and transportation costs are adding to inflationary pressures.

Rao noted that below-average monsoon rainfall and rising El Niño risks could affect upcoming crop production, potentially adding to food-price pressures.

Against this backdrop, headline inflation is expected to remain above 5 per cent during the second half of FY27, she said, keeping inflation risks high on the monetary policy agenda.

The external sector has meanwhile received support from increased foreign-currency inflows. According to Rao, the sharp rise in inflows has strengthened India’s external buffers but has also created challenges for liquidity management.

RBI special swap windows have raised $143 billion, including $133 billion through FCNR (B) deposits, pushing India’s foreign exchange reserves above $780 billion.

The increase in foreign-currency inflows has also contributed to a sharp rise in surplus liquidity in the banking system. This has required liquidity-management measures, including variable rate reverse repo (VRRR) operations and open-market operations, to manage excess liquidity and its impact on bond yields.

DBS expects India’s current account deficit in FY27 to remain around 1.1 per cent of GDP, while the overall balance of payments could remain in surplus, supported by continued capital inflows.

According to Rao, key factors for the economic outlook in the coming months will include the trajectory of inflation, liquidity conditions, energy prices and the sustainability of organic capital inflows as the impact of the special swap measures gradually fades.