India Could Clock 7.3 Per Cent Growth In FY27, But Inflation Remains At The Heart Of Monetary Policy

India's economy is projected to grow by 7.3 percent in the fiscal year 2027 (FY27), driven by robust domestic demand and increased capital inflows, according to DBS Bank economist Radhika Rao. The expansion began strongly in the first quarter, with GDP rising 7.8 percent year-on-year. Factors contributing to the growth included consumption, public capital expenditure, and manufacturing. High-frequency indicators like GST collections, e-way bills, electricity demand, and digital payments have remained robust.

However, the pace of growth may slow down in the latter half of FY27 due to tighter financial conditions, increased energy prices, and base effects. Inflation is again a key concern for monetary policy. Retail inflation spiked to 4.8 percent in August, driven by price increases in sugar, milk, protein-rich foods, and edible oils.

Additional pressure was exerted by rising energy and transport costs. Moreover, weak monsoon rainfall and an intensifying El Niño might impact crops and food prices. DBS anticipates headline inflation to stay above 5 percent during the second half, prompting the Reserve Bank of India to maintain a focus on price stability.

India's capital inflows have bolstered external buffers. Foreign currency non-resident bank deposits and special RBI swap windows have amassed $143 billion, lifting exchange reserves past $780 billion. Nevertheless, the inflows have swelled the banking system's surplus liquidity. The RBI has countered this by employing variable rate reverse repo auctions and open-market operations to soak up excess funds and control their impact on bond yields.

Looking ahead, DBS expects India's current account deficit for FY27 to remain close to 1.1 percent of GDP. The balance of payments is projected to stay in surplus due to incoming capital flows. Moving forward, investors and policymakers will closely watch inflation, crude oil prices, liquidity management, and the sustainability of organic capital inflows as the effects of the special swap arrangements diminish.