Ind-Ra raises FY27 growth forecast to 6.8%, cuts oil price assumption to $85/bbl

India Ratings and Research on Tuesday raised its forecast for India's economic growth in fiscal 2026-27 to 6.8% from 6.7%.

India's economy grew at a faster-than-expected 7.7% in fiscal year 2025-26, retaining its position as the world's fastest-growing major economy.

The agency warned that higher food and fuel inflation, a weaker rupee and the risk of an El Nino weather pattern could weigh on the outlook.

Earlier this month, the Reserve Bank of India (RBI) had raised growth projections from 6.6% to 6.7%, citing a resilient domestic economy.

"Lower oil prices positively impact the Indian economy by reducing the trade/current account deficit," said Devendra Pant, chief economist and head of public finance at Ind-Ra. "However, higher inflation due to El Nino may limit growth upside from lower oil prices."

Ind-Ra has lowered its average crude oil price assumption for 2026-27 to $85 a barrel from $95 in its May forecast.

The Indian crude basket averaged $101.31 a barrel in the first quarter of the fiscal year and $96.49 in April-July.

The agency expects petrol and diesel pump prices to remain unchanged despite elevated global oil prices.

Inflation, monsoon risks

Ind-Ra expects consumer price inflation to average 4.9% in 2026-27, compared with 2.1% in the previous fiscal year, while wholesale price inflation is projected at 8.5%, up from 0.7%.

It said food inflation was likely to remain elevated at least until October because of an adverse base effect and the impact of weak and uneven monsoon rainfall.

Cumulative rainfall was 11.3% below normal through August 7, after a 39.8% shortfall at the end of June, the agency said.

Ind-Ra expects seasonal rainfall to be 90.6% of normal, assuming rainfall of 94% of the long-period average during August and September.

Government spending to support growth

Government capital expenditure is expected to remain a key driver of investment, particularly in infrastructure, supporting sectors such as manufacturing, cement and steel.

Ind-Ra expects gross fixed capital formation to grow 8% in 2026-27, marginally slower than 8.2% in the previous fiscal year but above its earlier forecast of 7.2%.

“If fiscal risks increase due to government interventions to mitigate the impact of West Asia crisis, the government may limit its capex growth,” it said.

The government is targeting a fiscal deficit of 4.3% of GDP in 2026-27, down from 4.4% in the previous year.

Ind-Ra said meeting the target would be challenging because of potentially higher subsidies for liquefied petroleum gas and fertilisers, lower fuel taxes and possible support measures to address the impact of El Nino.

The agency expects any government response to the West Asia crisis to rely more on credit measures such as guarantees than direct spending, limiting pressure on public finances.

Rupee, current account under pressure

Ind-Ra expects the rupee to average 93.98 per dollar in 2026-27, a depreciation of 6.4% from the previous fiscal year.

It forecasts India's current account deficit to widen to 1.5% of GDP from 0.6% in 2025-26, driven by higher energy import costs and currency depreciation.

The agency expects about $70 billion in capital inflows through foreign currency non-resident bank deposits and external commercial borrowings, which it said would help address short-term external financing pressures.

The benchmark 10-year government bond yield is expected to remain around 7%. Yields had risen above 7% in late April but fell below that level after efforts by the government and Reserve Bank of India to attract dollar inflows.

Ind-Ra expects quarterly GDP growth of 6.9%, 6.6%, 6.7% and 6.9% in the four quarters of 2026-27, broadly in line with the Reserve Bank of India's forecasts.

Downside risks include further geopolitical escalation, high inflation, a weaker rupee, weaker-than-expected government capital spending, weak global trade and the impact of a strong growth base in 2025-26.

Ind-Ra also cited the US government's proposal of a 100% tariff on India over purchases of Russian crude as a risk to the outlook.

A lower oil price, weaker-than-expected El Nino conditions and stronger capital inflows could push growth above its 6.8% forecast, it said.

For 2027-28, Ind-Ra expects real GDP growth to improve by 20-50 basis points from its 6.9% forecast for 2026-27, assuming normal rainfall, stable crude oil prices and capital flows, easy liquidity, continued domestic demand and government capital spending.