Fitch Raises India's FY27 Growth Forecast To 6.9% On Strong Economic Activity, Investment Momentum

Fitch Ratings has upgraded its growth forecast for India in the fiscal year 2026-27 to 6.9%, from the previous estimate of 6.4%. This upward revision is attributed to a stronger economic momentum and the economy's resilience against energy price fluctuations resulting from the ongoing US-Iran conflict. The rating agency noted that India's actual performance has surpassed its earlier expectations, resulting in a 50-basis-point increase in its forecast.

India's economic growth has outpaced projections, with the economy expanding by 7.8% year-on-year in the April-June quarter. The acceleration in expansion during the previous quarter to 8.6% has further bolstered the outlook. Consequently, Fitch now anticipates a growth rate of 7.8% for FY26, an increase from its earlier projection of 7.4%.

The agency attributes the investment momentum to the government's capital expenditure, which has sparked a wider investment cycle, driving capital formation to reach 34% of GDP in Q1. Private investment continues to support growth prospects, despite the expectation of moderate growth in the upcoming quarters. The agency anticipates below-normal monsoon rainfall and potential strain on rural demand, which may temper the growth trajectory.

While Fitch acknowledges that higher inflation could impact household purchasing power and consumer spending, it maintains that private investment will remain a crucial growth driver. The rating agency projects a 10.6% increase in fixed investment in FY27, compared to 8% in FY26. Notably, non-food credit growth accelerated to 19% year-on-year in July, indicating robust lending activity.

Inflation poses a significant risk to India's economic outlook, with Fitch projecting it to rise to 5.5% by December 2026 before gradually aligning with the Reserve Bank of India's 4% target. To counteract inflationary pressures, the RBI is expected to raise the policy rate by 25 basis points to 5.5% in October, with further hikes anticipated in early 2027. The rates may subsequently ease to 5.5% by 2028.

Fitch expects the rupee to remain relatively stable in the near term, before experiencing a gradual depreciation. The projected dollar-rupee exchange rate is anticipated to be 95 by the end of 2026 and 98 by the end of 2027.