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. She expects momentum to moderate in the second half as tighter policy, higher energy prices and base effects weigh, while inflation above 5% and liquidity management shape policy and FX dynamics into FY28.

Growth outlook, inflation and FX risks

"India registered strong growth at the start of FY27. Sustaining this performance will depend increasingly on how effectively it navigates a more uncertain global environment. Besides trade fragmentation, geopolitical tensions leading to higher energy prices, and shifts in international capital flows present key external risks."

"High frequency indicators put 2QFY growth close to 7%. We expect full year FY27 growth to average 7.3% yoy from a revised 7.8% in FY26, assuming moderation in the momentum in the second half of the year on tighter policy conditions, lagged impact of high energy prices and base effects from indirect tax cuts last year fade."

"Assuming some spillover impact of exogenous uncertainties and tight financial conditions at home, we expect FY28 growth to average 6.8-7.0%. A gradual broadening of price pressures is likely to keep headline inflation above 5% in second half of the fiscal year, sharply narrowing the real rate buffer, underscoring the need for a tighter policy bias."

"Add to this, recent developments, including a sustained rise in crude prices, tightening global financial conditions, firm domestic growth and signs of broadening in core pressures, strengthen the case for a shallow 50bp hike in second half of FY27, making October’s meeting a live one."

"When the liquidity dust settles, focus will also be on the bunched-up maturities that will fall due in 3Y and 5Y tenor of the deposits. A portion of the existing reserve stock could be earmarked against these liabilities, helping to mitigate concerns that deposit maturities or debt repayments could trigger a sharp increase in dollar demand and exert pressure on the FX market down the line."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)