Inflation, El Nino Risks Weigh on FY27 Outlook
Key Highlights
- India Ratings & Research expects GDP growth to slow to 6.8 per cent in FY27.
- The economy expanded 7.6 per cent in the previous financial year.
- The latest forecast is slightly higher than Ind-Ra’s earlier estimate of 6.7 per cent.
- RBI has projected FY27 economic growth at 6.7 per cent.
- Ind-Ra expects retail inflation to average 4.9 per cent, compared with 2 per cent in FY26.
- Average crude oil prices are estimated at $85 per barrel for FY27.
- The rupee-dollar exchange rate is projected to average ₹93.98 during the fiscal year.
- India’s current account deficit is expected to widen to 1.5 per cent of GDP from 0.6 per cent.
- West Asia uncertainty, a weak rupee and the potential impact of El Nino on agriculture remain key risks.
India’s economic growth is expected to moderate to 6.8 per cent in the current financial year from 7.6 per cent in FY26 as inflationary pressures, currency weakness and potential disruption to agriculture from El Nino weigh on the outlook, according to India Ratings & Research (Ind-Ra).
The domestic rating agency’s latest FY27 GDP growth projection is marginally higher than the 6.7 per cent estimate it made in May.
The Reserve Bank of India (RBI) earlier this month also raised its FY27 growth forecast to 6.7 per cent from 6.6 per cent, citing resilience in the domestic economy.
Ind-Ra attributed the expected moderation in growth to higher fuel and food inflation arising from uncertainty surrounding the West Asia conflict, a weaker currency and the likely impact of El Nino on Indian agriculture.
Quarterly growth seen between 6.6% and 6.9%
Ind-Ra expects India’s economy to expand 6.9 per cent in the April-June quarter of FY27, followed by 6.6 per cent during July-September.
Growth is projected at 6.7 per cent during October-December before accelerating to 6.9 per cent in the January-March quarter.
The RBI’s corresponding quarterly projections stand at 7 per cent, 6.4 per cent, 6.5 per cent and 6.8 per cent, respectively.
The forecasts indicate that economic growth is expected to remain relatively stable through FY27 despite external and domestic risks.
Crude oil assumption lowered to $85
India Ratings has lowered its average crude oil price assumption for FY27 to $85 per barrel from the $95 per barrel it had estimated in May.
Ind-Ra Chief Economist and Head of Public Finance Devendra Pant said the Indian basket of crude oil averaged $101.31 per barrel during the June quarter of FY27 and $96.49 per barrel during April-July 2026.
Lower crude oil prices can benefit India’s economy by reducing its import bill and helping contain the trade and current account deficits.
However, Ind-Ra cautioned that higher inflation resulting from El Nino could restrict some of the potential growth benefits arising from lower oil prices.
Retail inflation forecast at 4.9%
The rating agency expects retail inflation to average 4.9 per cent during FY27, a sharp increase from 2 per cent in the previous financial year.
Food prices remain particularly vulnerable to weather conditions, making the potential impact of El Nino on agricultural production an important risk to the inflation and growth outlook.
Fuel prices and movements in the rupee could add further pressure.
Ind-Ra expects the rupee-dollar exchange rate to average ₹93.98 during FY27, compared with its May forecast of ₹94.28. This would represent a depreciation of around 6.4 per cent year-on-year.
Current account deficit may widen
India’s current account deficit is projected to widen to 1.5 per cent of GDP in FY27 from 0.6 per cent in FY26.
Ind-Ra estimates capital flows of around $70 billion through foreign currency non-resident bank deposits, or FCNR(B), and external commercial borrowings.
Lower international crude prices could provide some support to the external balance, given India’s substantial dependence on imported energy.
Fiscal deficit target remains challenging
The government’s FY27 fiscal deficit target of 4.3 per cent of GDP could also prove challenging, according to the rating agency.
Subsidies on liquefied petroleum gas and fertilisers are among the factors that could put pressure on government finances.
Pant said direct tax collections and non-tax revenues could support the government’s efforts to achieve its fiscal deficit target, while indirect tax collections may prove more challenging.
The overall economic outlook therefore remains supported by domestic resilience but faces risks from inflation, weather conditions, currency movements, energy prices and continued uncertainty in West Asia.
