Despite a robust 7.8% growth in the April-June quarter and an expected strong performance in the July-September period, India's economic outlook for the second half of the financial year ending March 2027 faces significant headwinds. Concerns stemming from an erratic monsoon, persistently high crude oil prices, and inflationary pressures are casting a shadow over the country's growth momentum.
Triple Threat to H2 Growth
Aditi Nayar, chief economist and head of research and outreach at ICRA, highlighted three primary reasons for a potentially lower growth rate in the second half. Firstly, the full impact of the monsoon's performance, particularly on the crucial rabi (winter) crop, is yet to be realized. Depleted reservoir levels and falling groundwater tables in some states are a major concern for agricultural output.
Secondly, the base effect from GST rationalization will make high-frequency growth figures appear lower than previously observed. Lastly, the elevated prices of crude oil and other commodities are expected to translate into higher costs for consumers, further squeezing household budgets.
RBI's Monetary Stance and Inflation Risks
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) increased the repo rate by 25 basis points to 5.50% on October 7, reacting to rising inflation and high crude prices. While many analysts anticipate further rate hikes, Nayar projects a more cautious approach, expecting another 25 basis points hike in December. She cautioned against overly aggressive monetary tightening, arguing it could stifle domestic demand and deter foreign investment.
ICRA forecasts average Consumer Price Index (CPI) inflation at 5.2% for the current financial year. However, Nayar warned of upside risks, with inflation in several sub-segments potentially breaching the RBI’s 6% comfort level in the third quarter. The primary risk remains crude oil prices and the extent to which these higher costs are passed on to consumers through retail fuel prices.
External Pressures: Rupee and Capital Outflows
Global factors are also contributing to India's economic challenges. Crude oil prices hovering above $110 a barrel are inflating India's import bill and putting significant pressure on the rupee. The currency has depreciated sharply against the US dollar this year, hitting a record low of 96.96 before recovering slightly to around 95.19 on October 30.
Foreign Portfolio Investors (FPIs) have withdrawn over Rs 2.94 lakh crore from the Indian equity market up to October 29, 2026. This sell-off is attributed to geopolitical uncertainties and a spike in bond yields in major markets, particularly the US, where the 10-year Treasury yield remains high at around 4.98%.
The RBI has implemented several measures to stabilize the rupee, including a special concessional swap window for foreign currency non-resident (bank) deposits and a dedicated window for state-owned oil marketing companies' foreign exchange needs. While these steps have helped, crude oil prices remain largely beyond the RBI's control, necessitating continued vigilance.