DBS Group Research economist Radhika Rao reports that India began FY27 with robust economic momentum, as high-frequency indicators suggest second quarter fiscal year (2QFY) growth is close to 7% [1]. The full-year FY27 growth is projected at 7.3% year-on-year, a slight moderation from the revised 7.8% in FY26, with expectations that growth momentum will slow in the second half due to tighter policy, higher energy prices, and fading base effects from previous indirect tax cuts [1].
Rao highlights several external risks, including trade fragmentation, geopolitical tensions leading to higher energy prices, and shifts in international capital flows, which could impact India's economic trajectory [1]. For FY28, growth is expected to average between 6.8% and 7.0%, factoring in spillover effects from global uncertainties and tight domestic financial conditions [1].
Inflation is anticipated to remain above 5% in the second half of the fiscal year, narrowing the real rate buffer and reinforcing the need for a tighter policy stance [1]. Recent developments such as sustained increases in crude oil prices, tightening global financial conditions, strong domestic growth, and broadening core inflation pressures support the possibility of a shallow 50 basis point rate hike in the second half of FY27, with the October policy meeting considered a 'live' event for such action [1].
Additionally, attention is drawn to upcoming maturities in the 3-year and 5-year deposit tenors, with a portion of existing reserves potentially allocated to these liabilities. This measure aims to alleviate concerns that deposit maturities or debt repayments could trigger a surge in dollar demand and put pressure on the foreign exchange market in the future [1].
CONCLUSION
India's economic outlook remains positive with projected FY27 growth at 7.3%, but risks from inflation, energy prices, and global financial conditions could prompt policy tightening. Market participants should monitor upcoming policy meetings and liquidity developments, as these factors may influence FX dynamics and overall market sentiment.