India's economy faces the challenge of sustaining rapid growth amid high inflation

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Economy: Growth and inflation

Highlights

The RBI raised its FY27 GDP growth forecast from 6.7 percent to 7.1 percent and its CPI inflation forecast from 5 percent to 5.2 percent.
The repo rate rose by 25 basis points to 5.5 percent, and the policy stance shifted to 'calibrated tightening,' making near-term rate cuts appear less likely.
Inflation reached 5.5 percent in September and food CPI stood at 7.7 percent; the RBI announced Rs 2.5 trillion in OMO sales and foreign exchange regulatory measures.

This article was translated from the original. Read the original version by our correspondent here.

RBI forecasts signal a tighter stance

Forbes India reports that the Reserve Bank of India has raised its forecasts for both growth and inflation for FY2027 in its latest monetary policy, indicating that the central bank remains confident in the economy's resilience even as price pressures intensify. The RBI now expects CPI inflation at 5.2 percent, up from 5 percent previously, while its GDP growth forecast has been raised from 6.7 percent to 7.1 percent.

At the same time, the RBI has raised the repo rate by 25 basis points to 5.5 percent and shifted its policy stance to "calibrated tightening," leaving little room for rate cuts in the near future. The move comes as the central bank sees inflationary pressures broadening beyond food and fuel, while demand-driven core inflation remains relatively contained.

Kapil Gupta, chief economist at Nuvama Institutional Equities, says that using demand-side tools such as interest rates to control inflation that is primarily supply-side-driven can become counterproductive beyond a certain point. Meanwhile, Barclays economist Aastha Gudwani says the Monetary Policy Committee is monitoring not only headline CPI but also indicators such as core CPI, diffusion indices and base effects to better assess underlying inflationary pressures.

In its statement, the RBI said that in the case of supply-side inflation, monetary policy primarily works to contain second-round effects, such as inflation expectations and corporate pricing behaviour. The bank assesses that there are some signs of elevated inflation expectations and broader price increases, but only limited indications so far that supply-side pressures are becoming permanently embedded in corporate pricing.

Risks to growth from food, fuel and cost pressures

Retail inflation rose to 5.5 percent in September from 4.8 percent in the previous month, with food inflation contributing the most. The Consumer Food Price Index climbed to 7.7 percent, while onion prices surged 108 percent, and pulses, edible oils, cereals, sugar, milk, eggs, fruits and nuts also remained under significant pressure.

Cumulative monsoon rainfall through the end of September was 12 to 13 percent below average, increasing uncertainty over agricultural output and food prices. Meanwhile, companies are facing renewed cost pressures from supply-chain disruptions and higher costs for energy, freight and industrial commodities.

Jahnavi Prabhakar, an economist at Bank of Baroda, says the West Asia conflict and rising crude oil prices could add further pressure to fuel inflation in the near term. According to Hitesh Suvarna, an analyst at JM Financial Institutional Securities, the RBI's tighter stance is a response to higher crude oil prices and the risk of inflation becoming more widespread in the domestic economy.

Downside risks to growth also persist. A prolonged geopolitical conflict could worsen supply-chain bottlenecks and input costs while weakening external demand, whereas lower rainfall could put pressure on agricultural output and rural purchasing power.

According to Garima Kapoor of Elara Securities, upside inflation risks and the RBI's intention to contain them are negative for India's benchmark government bond yields. She says domestic demand and credit growth remain sufficiently strong, allowing higher costs to pass through the economy quickly and giving the RBI room to prioritize inflation management.

Following the monetary policy review, the RBI also announced several measures to absorb excess liquidity and stabilize the rupee. These include open market operation sales of Rs 2.5 trillion, raising the daily CRR floor to 99 percent, a special dollar-sale window for public-sector oil companies, tighter foreign exchange derivatives rules, and a new foreign exchange risk reserve on importers' hedges.

The real test for investors and businesses now lies in the coming quarters. If the impact of high commodity prices, a weak monsoon and expensive borrowing spreads widely through the economy, only then will it become clear whether the RBI has struck the right balance or tightened policy further just as the economy is beginning to feel the strain.

Our previous report discussed significantly below-average rainfall during the 2026 southwest monsoon amid El Niño and its economic impact. It noted that weak and uneven monsoon rainfall could put pressure on kharif sowing and crop yields, lower reservoir levels could also affect rabi output, and risks to food inflation could rise alongside rural demand in the second half of FY2027.

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