India’s growth momentum may ease in FY27 second half, says DBS economist

India's economy is likely to lose some momentum in the second half of fiscal 2026-27 as tighter financial conditions, elevated energy prices and unfavourable base effects weigh on activity, while broadening inflation pressures could keep monetary policy focused on price stability, DBS Bank economist Radhika Rao said.

India started FY27 (April 2026 to March 2027 fiscal year) on a strong footing, with the economy growing 7.8 per cent year-on-year in the first quarter, supported by resilient domestic demand, consumption, public capital expenditure and manufacturing, Rao, Senior Economist and Executive Director at DBS Bank, said in an assessment of the macroeconomic outlook.

DBS expects full-year FY27 growth to average 7.3 per cent, compared with a revised 7.8 per cent for FY26, she said.

High-frequency indicators including goods and services tax collections, e-way bills, electricity demand and digital payments have remained resilient, suggesting domestic activity continues to hold up, Rao said. However, tighter financial conditions, higher energy costs and base effects are expected to weigh on growth later in the fiscal year.

Inflation is emerging as a key risk. Consumer inflation rose to 4.8 per cent in August, with price pressures broadening beyond food to include sugar, milk, protein-rich food groups and edible oils, alongside higher energy and transport costs.

Below-average monsoon rainfall and rising El Niño risks could add to pressure on crop output, she said. DBS expects headline inflation to remain above 5 per cent in the second half of FY27, keeping inflation risks central to the monetary policy outlook.

Liquidity management has also become more challenging amid a sharp rise in foreign-currency inflows. RBI special swap windows have raised about USD 143 billion, including USD 133 billion through FCNR(B) deposits, pushing India's foreign exchange reserves above USD 780 billion, according to Rao.

The inflows have strengthened India's external buffers but have simultaneously added to surplus liquidity in the banking system. The Reserve Bank of India has had to use instruments including variable-rate reverse repos (VRRR) and open-market operations to manage excess liquidity and its impact on bond yields.

India's external position remains supported by capital inflows despite a widening merchandise trade deficit. DBS forecasts the current account deficit at around 1.1 per cent of GDP in FY27, while the overall balance of payments could remain in surplus on the back of capital inflows.

The sustainability of those inflows will be an important consideration as the effect of the RBI's special swap measures fades, Rao said. Inflation, domestic liquidity, energy prices and the durability of organic capital flows are likely to be key variables for markets and policymakers in the months ahead.