India growth outlook eases as inflation pressures build

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India growth and inflation outlook

Highlights

Economists in a Reuters poll forecast India's GDP growth to slow from 7.7% in FY 2025-26 to 7.1% in FY 2026-27 and 7.0% in FY 2027-28.
The Reserve Bank of India is expected to raise rates twice more to 6.0% by end-March, as inflation—averaging 6.1% this quarter—remains above the 4% target until at least end-2027.
Private investment expanded nearly 12% in the June quarter but faces headwinds from oil trading at $116 a barrel and missed AI investment opportunities, while future welfare subsidies are set for a 4.5% cut in 2026-27.

Forecast points to slower expansion

As reported by Reuters, economists in an October 19-26 poll forecast India's gross domestic product will grow 7.1% in the fiscal year ending March 2027, down from 7.7% in FY 2025-26. Growth is then expected to ease further to 7.0% in FY 2027-28, broadly in line with Reserve Bank of India expectations and an earlier Reuters survey.

The U.S.-Israeli-led war with Iran has so far had limited impact on economic growth, but it is pushing up inflation mainly through higher energy costs. The Reserve Bank of India has raised rates once and is expected to do so twice more, taking them to 6.0% by end-March.

Economists have underestimated India's growth in 10 of the past 12 quarters, even though forecasts have generally clustered close to 7%. Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, says that while 7% growth looks healthy in the current global climate, it is probably only average for India.

Jobs, investment and household pressure

Private investment, a key driver of job creation, expanded by nearly 12% in the June quarter, but forecasters say sustaining that pace is becoming harder if oil prices remain elevated. Crude oil futures are trading around $116 a barrel, about 60% above pre-war levels, while India has also missed out on the surge in AI investment that has supported growth in other Asian economies such as South Korea.

Chanco says India is caught between weak private investment growth at home and a global AI backdrop that reduces the need for entry-level hiring. A student-led movement that began as online satire has moved onto the streets in recent months, reflecting rising concern over education and jobs despite rapid economic growth.

Inflation is also squeezing household budgets as savings dwindle. Price growth is forecast to average 6.1% this quarter and remain above the RBI's 4% medium-term target at least until end-2027, a slightly higher outlook than in last month's survey.

Kunal Kundu, India economist at Societe Generale, says stronger cost pass-through from higher energy prices and gradually rising services inflation increase the risk that elevated price pressures become embedded. Economists also warn households are exposed to future welfare spending cuts after the 2026-27 budget projected a 4.5% reduction in food, fertiliser and petroleum subsidies.

S&P Global Ratings’ warning on rising sovereign borrowing risks explained how persistent geopolitical tensions and elevated fiscal spending can strain government finances in a higher-rate environment. Our publication previously noted that energy and food price shocks linked to major conflicts can keep headline inflation elevated, erode fiscal headroom, and complicate refinancing as debts roll over at higher costs.

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