India: Growth, liquidity and policy response – DBS
DBS Group Research economist Radhika Rao assesses India’s strong start to FY27, with high-frequency data pointing to around 7% growth in 2QFY and full-year FY27 growth of 7.3% year-on-year.
India experienced robust growth at the beginning of FY27, with high-frequency data indicating a potential 7% growth in the second quarter and a full-year growth of 7.3% year-on-year. However, this momentum is expected to moderate in the latter half of the year due to tighter policy measures, higher energy prices, and base effects from previous tax cuts. Inflation has been persistently above 5%, shaping policy responses and foreign exchange dynamics throughout FY28.
Key external risks include trade fragmentation, geopolitical tensions leading to higher energy prices, and shifts in international capital flows, which could impact India's economic performance. High-frequency indicators suggest that 2QFY growth is close to 7%, while full-year FY27 growth is projected at 7.3% year-on-year, assuming a moderation in momentum due to tighter policy conditions, lagged impacts of high energy prices, and fading base effects from indirect tax cuts.
If external uncertainties and domestic financial conditions tighten further, FY28 growth is expected to average between 6.8% and 7.0%. The gradual broadening of price pressures is likely to maintain headline inflation above 5% during the latter part of the fiscal year, narrowing the real rate buffer and emphasizing the need for a more conservative policy stance.
Recent developments, such as a persistent rise in crude prices, tightening global financial conditions, robust domestic growth, and growing concerns over core pressures, strengthen the case for a shallow 50 basis points hike in the second half of FY27. This hike is scheduled for October's meeting, making it a critical point to watch.
Managing the liquidity situation will also be crucial, with a focus on the upcoming maturities of deposits in the 3- and 5-year tenors. Allocating a portion of the existing reserve stock to cover these liabilities could help alleviate concerns about deposit maturities or debt repayments leading to increased dollar demand and FX market pressure.
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