<h2><strong>Politics & Policy: A Near-Term Review</strong></h2>. <p><em><strong>An unproductive session</strong></em></p><p>With the Monsoon Session of Parliament wrapping up in mid-August, reported productivity levels in the Lok Sabha fell to their lowest in nearly two decades, according to Parliamentary Research Services (PRS). With the government and the opposition both accusing the other of causing disruption, 12 bills were introduced and 11 passed. The only meaningful debate to take place was over the Public Examination Amendment bill – unsurprisingly, given the month-long agitations over leaked NEET exam papers that ended with the Education Minister’s resignation.</p>.<p>The FCRA Amendment Bill, which adds new restrictions on foreign contributions to individuals and organisations in India, was expected to pass with relative ease. However, the opposition managed to maintain a united front on a few key bills, and this particular one was referred to a joint parliamentary committee. This may signal that the NDA’s ‘working majority’ position has weakened. The NDA also remains far from the two-thirds supermajority needed to pass some of its more contentious agenda items, such as combining women’s reservations with delimitation, or shifting India to a One Nation One Election (ONOE) environment. Much ink has been spilled pointing out the fact that, despite adjourning Parliament <em>sine die</em> weeks ago, the Monsoon Session remains technically ‘alive’, not having been prorogued. This has given rise to allegations that the Centre plans to convene another special session to push women’s reservation and delimitation.</p> .<p><em><strong>Industrial policy broadens </strong></em></p><p>On the policy front, the Cabinet approved the Rs 1.3 tr Semicon 2.0 policy, which aims to boost India’s semiconductor design and manufacturing ecosystem, the Rs 625 bn Mobile Phone Manufacturing Scheme and a Rs 30 bn scheme for three greenfield chemical parks. It is also preparing to open nuclear power to private investment under the SHANTI Act once the necessary regulatory framework is developed. These policies align with the government’s overall Make in India thrust, which has become even more salient as the liberal trade order slowly crumbles. Interestingly it also marks a shift in India’s strategy away from attracting individual projects to building domestic capacity around the manufacturing ecosystem, including suppliers, technology, infrastructure and capabilities that will allow industries to scale domestically. </p> .<p><em><strong>India continues to hedge its bets globally </strong></em></p><p>India’s recent external engagements have centred on protecting trade and energy interests. Shipping through Hormuz has fallen sharply amid renewed US-Iran hostilities, and Iran has threatened further restrictions. As India looks to secure alternate sources for energy security, the US has stepped in to become a much larger LPG supplier with its share reportedly rising from under 10% to over 50% in 6 months. A wider India-US trade deal, however, remains up in the air. Following the US Supreme Court's intervention, the immediate tariff environment has become more manageable for India as the proposed move to Section 301 will require a lengthy investigative process. India therefore has an incentive to wait rather than make further concessions while the legal process runs its course. At the same time, likely Democratic advances in the November US mid-term elections could limit the Trump administration’s ability to pursue major policy initiatives. This means there is a small, limited window before the elections in which the administration could choose to revisit these talks. </p><p>These unresolved negotiations have added to uncertainty around India’s access to its largest export market, even as ties with China have improved, with FM Jaishankar and Foreign Secretary Vikram Misri separately meeting their Chinese counterparts to discuss border issues, market access and supply chains, and PM Modi holding direct talks with Xi Jinping. The India-Japan economic-security partnership has also deepened, with fresh investment commitments worth $12.5 bn including cooperation on semiconductors, critical minerals and energy along with a ‘next generation mobility partnership’ and a defence co-development project. </p><p>As the 2026 BRICS Chair, India hosted the New Delhi summit in September. Aside from strengthening intra-BRICS cooperation and proposing joint security initiatives, the meeting helped facilitate the highest-level bilateral meeting between warring Iran and UAE since the start of the West Asia crisis. </p><p>India and Russia held a bilateral meet ahead of the summit to discuss trade and economic cooperation and align on global issues. Camaraderie between PM Modi and President Putin was also evident at the SCO summit last month where members – Russia and Iran in particular – backed a declaration calling for reforms to the international financial system, currently blocked up by unilateral sanctions. Crucially, Chinese premier Xi Jinping’s first visit to India in 7 years for the summit reaffirmed political will on both sides to normalise ties and expand business links. Lastly, conversations around cross-border payments, routing trade through local currencies and CBDCs also featured at the summit. Perhaps influenced by US pressure, member countries unequivocally dismissed de-dollarisation as a viable option and clarified their goal was interoperability among national payment systems and not a unified BRICS currency. </p>.<h2>A Macroeconomic Review</h2>.<p>The Indian economy grew by 7.8% in Q1 (Apr-Jun 2026), exceeding most forecasts but moderating from the previous quarter’s (Jan-Mar) downwardly-revised 8.6%. Services and manufacturing led growth, supported by strengthening investment and exports. </p><p>A GDP base year shift to 2022–23 in February introduced double-deflation for manufacturing, adjusting output and input price changes separately. The revised methodology has been contested over concerns that a lower comparison base and a deflator that may understate price increases have amplified reported growth. However, the government, and many agencies, including the IMF, maintain that the revised methodology improves accuracy.</p><p><strong>The forward view:</strong> The RBI currently forecasts FY27 growth at <strong>6.7%</strong>. IMA continues to retain its <strong>~6.5%</strong> forecast, despite the stronger-than-expected Q1 outcome, resilient services sector and rising public investment. The growth momentum is likely to moderate as elevated oil prices squeeze margins and purchasing power, monsoon weaknesses weighs on rural demand and trade disruptions constrain exports. Downward revisions to the Q1 GDP numbers remain a distinct possibility, going by recent trends.</p> <ul><li><p><em><strong>Agriculture</strong></em><strong>:</strong> Growth slowed to 3.6% in Q1 from 4.4% a year earlier. Weaker livestock output, the result of high temperatures and flooding, was a contributor to the slowdown. Deficient June rains disrupted <em>kharif</em> (summer) sowing, with the resulting impact on crop output expected to emerge more fully during the harvest, i.e., in subsequent quarters.</p><p><strong>Watch out for: </strong>Our estimates place agricultural growth at <strong>~2% in FY27</strong>, with the relatively-strong first-quarter figures cushioning weak kharif output. Uneven rainfall and high temperatures threaten yields, while low reservoir storage level in some regions could constrain <em>rabi</em> (winter) sowing, limiting support for rural incomes and consumption.</p></li></ul> <ul><li><p><strong>Industry: </strong>Manufacturing growth strengthened to 9.2% in Q1 from 8.3% a year earlier, supported by recovering utilities and faster construction growth. A 2.4% contraction in the mining sector held overall industrial growth at 7.7%. Strong output growth has yet to translate into sustained hiring: August’s manufacturing PMI numbers include the first decline in employment in two-and-a-half years.</p><p><strong>Watch out for: </strong>We expect industrial growth to moderate as softer orders and elevated energy costs weigh on manufacturing while public infrastructure spending supports construction. Sustained employment generation will depend on demand translating into capacity expansion and hiring.</p></li></ul> <ul><li><p><strong>Tertiary sector:</strong> Services remain India’s main growth driver, with the acceleration concentrated in financial, real estate, IT and professional services. Public administration and other services provided additional support and trade, hospitality, transport and communication lost momentum. Weakening international air traffic and declining rail freight volumes are contrasting with stronger domestic activity, highlighting an uneven expansion across services.</p><p><strong>Watch out for:</strong> We expect services to remain in pole position, but sustaining Q1’s double-digit pace will be difficult. August’s improvement in business activity and hiring supports continued expansion, but new-business growth remained subdued. Sustained demand will be essential for the stronger hiring momentum to continue</p> </li></ul>.<p><em><strong>What are Lead Indicators saying?</strong></em></p>.<p><strong>Manufacturing employment fell for the first time in two-and-a-half years, while services job creation reached a 15-month high.</strong> </p><p>Softer cost pressures helped manufacturers limit price hikes, while services inflation edged up modestly.</p> <p><strong>Watch out for:</strong> We expect manufacturing and services activity to continue expanding, but growth will hinge on improving order books. Unsold inventories could restrain manufacturing output, while services firms need sustained new business to maintain their recent improvement.</p>.<ul><li><p><strong>Credit growth has broadened across sectors.</strong> Non-food credit growth rose to 19.1% in July, its fastest since May 2024, and almost double the pace a year earlier. Lending to services, industry and agriculture all accelerated.</p></li><li><p>Lending to industry grew by 20%, its strongest since January 2019, while that to services grew by 22.9%. Both have accelerated since the start of FY27. Overall credit demand is expected to remain healthy through FY27, with growth projected at 15–16%.</p></li></ul>.<p><em><strong>Investment - Picking Up</strong></em></p>.<p><em><strong>Consumption - Holding Up, For Now</strong></em></p>.<p>Household demand remains uneven across categories. Vehicle sales reached record highs in April–July 2026, supported by lower GST rates and strong domestic demand, while domestic air passenger traffic grew just 1.7%.</p><ul><li><p>Passenger car sales surged by 26.4% in July, but the sector is seeing large month-on-month variations, with June sales growing by just 2.4%. Two-wheeler sales have been more consistent, growing 23.7% in July, marking 9 consecutive months of double-digit growth.</p></li><li><p>FMCG demand weakened in Q1 with NielsenIQ reporting value growth of just 0.8%, while volumes contracted by 2%. Urban FMCG volumes were broadly flat while rural volumes declined by 5%, with the weakness concentrated in traditional trade even as modern trade and e-Commerce remained resilient.</p></li><li><p>Consumer borrowing is a mixed bag. Personal loan growth has been broadly steady since the start of FY27, while credit card purchases appear to be slowing. Consumer durables lending edged up 0.4% after 8 consecutive months of contraction. </p> </li><li><p><strong>Watch out for:</strong> Festive spending should support household demand but the recovery is likely to remain uneven. According to a widely tracked RBI survey, consumer expectations for the year ahead have weakened for 3consecutive survey rounds, pointing to rising caution around spending. A pick-up inflation and weather-related disruptions present further risks, particularly to rural consumption, where optimism has deteriorated more sharply.</p></li></ul>.<p><em><strong>The Fiscal Position - Emerging Risks</strong></em></p>.<p>The Centre targets a deficit of 4.3% of GDP in FY27, alongside a reduction in its debt-to-GDP ratio to 55.6%, from 56.1% in FY26, and towards 50% ±1 percentage point by March 2031. As of July, the deficit stood at 26.8% of the annual target, below last year’s 29.9%, despite capital expenditure growing 30%.</p><p><strong>Watch out for: </strong>We expect the Centre’s fiscal deficit to close FY27 at around 4.4% of GDP, marginally above the 4.3% target. Strong tax collections should limit slippage, although weaker excise and personal income-tax receipts and additional subsidy pressures from elevated commodity prices remain key risks. Tax revenues will need to grow more sharply than expected for the Budget estimates to be met. </p>.<p><em><strong>Inflation and Interest Rates: On the Rise</strong></em></p>.<ul><li><p><strong>Headline inflation </strong>has moved decisively past the RBI’s 4% target while underlying demand pressures remain contained.</p></li><li><p><strong>Core inflation has stayed relatively stable</strong>, partly due to the lingering favourable base effect of the September 2025 GST cuts and declines in gold and silver prices over Feb–Jul. Core inflation is expected to moderate in the near term (the RBI currently projects it at 4.3% for FY27 as a whole), underpinned by limited demand-led price pressures.</p></li><li><p><strong>The MPC held the repo rate at 5.25% and retained a ‘neutral’ stance at its August 2026 meeting.</strong> The RBI trimmed its FY27 inflation forecast to 5% from 5.1%. It also lowered Q2 headline inflation to 4.7% from 5.1%, retained Q3 at 5.9% and raised Q4 to 5.5% from 5.4%, with Q1FY28 at 5.3%.</p></li><li><p><strong>However, the RBI flagged the monsoon and global prices as key risks ahead.</strong> A deficient, uneven monsoon threatens the kharif output, while global commodity prices and exchange rates remain key risks. </p></li><li><p><strong>Watch out for:</strong> A Fed rate hike could strengthen the dollar and place renewed pressure on the rupee, adding to imported inflation and narrowing the RBI’s room to keep rates unchanged. </p></li></ul>.<ul><li><p><strong>WPI inflation averaged 9.5% in the first fourth months of FY27</strong>, compared with a 0.2% decline a year earlier, highlighting the sharp reversal in price pressures.</p></li><li><p><strong>The WPI base year has been moved from 2011–12 to 2022–23.</strong> The government plans to phase out the WPI over roughly five years, with the transition following international practice and IMF recommendations.</p></li><li><p><strong>The new Producer Price Index (PPI) tracks prices received by producers</strong>, extending coverage to services and including export prices. The WPI uses ex-factory prices for manufactured goods, excluding transport charges and GST; PPI’s broader coverage improves the measurement of producer prices and the adjustment of national accounts for inflation.</p></li><li><p><strong>Oil prices have risen again</strong>, with Brent near $108 a barrel after attacks left Saudi Arabia’s East-West pipeline offline and heightened risks to Gulf and Red Sea shipments. With India’s crude import bill already sharply higher, sustained price pressures could widen the current account deficit, squeeze corporate margins and household purchasing power and further limit the RBI’s room to cut rates.</p></li></ul>.<p><em><strong>The External Sector: On a Knife's Edge</strong></em></p>.<p><strong>A Widening Current Account</strong></p>.<ul><li><p><strong>Merchandise trade:</strong> Exports rose by 17% to $174 bn in Apr-Jul but imports increased 19% to $292 bn, widening the deficit from $97 bn to $119 bn. Diversification beyond the US is supporting exports, but tariff-related uncertainties and weakening global growth remain headwinds. Elevated oil and electronics prices, higher Chinese producer prices and shipping disruptions will push up India’s import bill.</p></li><li><p><strong>Services trade:</strong> Exports grew by 8.8% to $143 bn in the first 4 months of the fiscal year, supported by computer, business and transportation services. However, imports grew by a faster 10%, to $73.5 bn. The services surplus is thus growing more slowly than the merchandise deficit, worsening the overall BoP situation. Uncertainty over global technology spending could constrain future export growth.</p></li><li><p><strong>Current account:</strong> In Q1 (Apr-Jun) India’s CAD widened to $4.2 billion, or 0.5% of GDP, from 0.4% a year earlier. Higher services earnings and remittance receipts cushioned the deterioration in merchandise trade.</p></li><li><p><strong>Watch out for:</strong> We expect the CAD to widen to around 1.4% of GDP in FY27 as import growth continues to outpace exports. A slow-growing or even narrowing services surplus will add to external pressures, which include elevated oil prices and shipping disruptions.</p></li></ul>.<p><strong>Pressures on the Capital Account Side</strong></p>.<p><strong>Watch out for:</strong> A potential Fed rate hike, elevated US bond yields and higher oil prices could keep portfolio flows volatile and pressure the rupee. FDI inflows will need to sustain at the Q1 rates to have a meaningful impact on the overall capital account position.</p>.<p><strong>Downward Pressure on the Rupee </strong></p>.<ul><li><p>RBI dollar sales and foreign-currency deposits from NRIs have helped limit near-term rupee depreciation but a full-scale reversal remains unlikely. Higher oil prices raise India’s import bill and dollar demand, while elevated US yields, dollar strength and foreign equity withdrawals constrain possible gains. Renewed West Asia tensions and shipping disruptions remain key risks, making the outlook sensitive to oil prices and capital flows. </p> <p><strong>Watch out for: </strong>We expect the rupee to trade in a 95–97/$ range through FY27. Continued RBI intervention will help contain volatility. </p></li></ul>
<h2><strong>Politics & Policy: A Near-Term Review</strong></h2>. <p><em><strong>An unproductive session</strong></em></p><p>With the Monsoon Session of Parliament wrapping up in mid-August, reported productivity levels in the Lok Sabha fell to their lowest in nearly two decades, according to Parliamentary Research Services (PRS). With the government and the opposition both accusing the other of causing disruption, 12 bills were introduced and 11 passed. The only meaningful debate to take place was over the Public Examination Amendment bill – unsurprisingly, given the month-long agitations over leaked NEET exam papers that ended with the Education Minister’s resignation.</p>.<p>The FCRA Amendment Bill, which adds new restrictions on foreign contributions to individuals and organisations in India, was expected to pass with relative ease. However, the opposition managed to maintain a united front on a few key bills, and this particular one was referred to a joint parliamentary committee. This may signal that the NDA’s ‘working majority’ position has weakened. The NDA also remains far from the two-thirds supermajority needed to pass some of its more contentious agenda items, such as combining women’s reservations with delimitation, or shifting India to a One Nation One Election (ONOE) environment. Much ink has been spilled pointing out the fact that, despite adjourning Parliament <em>sine die</em> weeks ago, the Monsoon Session remains technically ‘alive’, not having been prorogued. This has given rise to allegations that the Centre plans to convene another special session to push women’s reservation and delimitation.</p> .<p><em><strong>Industrial policy broadens </strong></em></p><p>On the policy front, the Cabinet approved the Rs 1.3 tr Semicon 2.0 policy, which aims to boost India’s semiconductor design and manufacturing ecosystem, the Rs 625 bn Mobile Phone Manufacturing Scheme and a Rs 30 bn scheme for three greenfield chemical parks. It is also preparing to open nuclear power to private investment under the SHANTI Act once the necessary regulatory framework is developed. These policies align with the government’s overall Make in India thrust, which has become even more salient as the liberal trade order slowly crumbles. Interestingly it also marks a shift in India’s strategy away from attracting individual projects to building domestic capacity around the manufacturing ecosystem, including suppliers, technology, infrastructure and capabilities that will allow industries to scale domestically. </p> .<p><em><strong>India continues to hedge its bets globally </strong></em></p><p>India’s recent external engagements have centred on protecting trade and energy interests. Shipping through Hormuz has fallen sharply amid renewed US-Iran hostilities, and Iran has threatened further restrictions. As India looks to secure alternate sources for energy security, the US has stepped in to become a much larger LPG supplier with its share reportedly rising from under 10% to over 50% in 6 months. A wider India-US trade deal, however, remains up in the air. Following the US Supreme Court's intervention, the immediate tariff environment has become more manageable for India as the proposed move to Section 301 will require a lengthy investigative process. India therefore has an incentive to wait rather than make further concessions while the legal process runs its course. At the same time, likely Democratic advances in the November US mid-term elections could limit the Trump administration’s ability to pursue major policy initiatives. This means there is a small, limited window before the elections in which the administration could choose to revisit these talks. </p><p>These unresolved negotiations have added to uncertainty around India’s access to its largest export market, even as ties with China have improved, with FM Jaishankar and Foreign Secretary Vikram Misri separately meeting their Chinese counterparts to discuss border issues, market access and supply chains, and PM Modi holding direct talks with Xi Jinping. The India-Japan economic-security partnership has also deepened, with fresh investment commitments worth $12.5 bn including cooperation on semiconductors, critical minerals and energy along with a ‘next generation mobility partnership’ and a defence co-development project. </p><p>As the 2026 BRICS Chair, India hosted the New Delhi summit in September. Aside from strengthening intra-BRICS cooperation and proposing joint security initiatives, the meeting helped facilitate the highest-level bilateral meeting between warring Iran and UAE since the start of the West Asia crisis. </p><p>India and Russia held a bilateral meet ahead of the summit to discuss trade and economic cooperation and align on global issues. Camaraderie between PM Modi and President Putin was also evident at the SCO summit last month where members – Russia and Iran in particular – backed a declaration calling for reforms to the international financial system, currently blocked up by unilateral sanctions. Crucially, Chinese premier Xi Jinping’s first visit to India in 7 years for the summit reaffirmed political will on both sides to normalise ties and expand business links. Lastly, conversations around cross-border payments, routing trade through local currencies and CBDCs also featured at the summit. Perhaps influenced by US pressure, member countries unequivocally dismissed de-dollarisation as a viable option and clarified their goal was interoperability among national payment systems and not a unified BRICS currency. </p>.<h2>A Macroeconomic Review</h2>.<p>The Indian economy grew by 7.8% in Q1 (Apr-Jun 2026), exceeding most forecasts but moderating from the previous quarter’s (Jan-Mar) downwardly-revised 8.6%. Services and manufacturing led growth, supported by strengthening investment and exports. </p><p>A GDP base year shift to 2022–23 in February introduced double-deflation for manufacturing, adjusting output and input price changes separately. The revised methodology has been contested over concerns that a lower comparison base and a deflator that may understate price increases have amplified reported growth. However, the government, and many agencies, including the IMF, maintain that the revised methodology improves accuracy.</p><p><strong>The forward view:</strong> The RBI currently forecasts FY27 growth at <strong>6.7%</strong>. IMA continues to retain its <strong>~6.5%</strong> forecast, despite the stronger-than-expected Q1 outcome, resilient services sector and rising public investment. The growth momentum is likely to moderate as elevated oil prices squeeze margins and purchasing power, monsoon weaknesses weighs on rural demand and trade disruptions constrain exports. Downward revisions to the Q1 GDP numbers remain a distinct possibility, going by recent trends.</p> <ul><li><p><em><strong>Agriculture</strong></em><strong>:</strong> Growth slowed to 3.6% in Q1 from 4.4% a year earlier. Weaker livestock output, the result of high temperatures and flooding, was a contributor to the slowdown. Deficient June rains disrupted <em>kharif</em> (summer) sowing, with the resulting impact on crop output expected to emerge more fully during the harvest, i.e., in subsequent quarters.</p><p><strong>Watch out for: </strong>Our estimates place agricultural growth at <strong>~2% in FY27</strong>, with the relatively-strong first-quarter figures cushioning weak kharif output. Uneven rainfall and high temperatures threaten yields, while low reservoir storage level in some regions could constrain <em>rabi</em> (winter) sowing, limiting support for rural incomes and consumption.</p></li></ul> <ul><li><p><strong>Industry: </strong>Manufacturing growth strengthened to 9.2% in Q1 from 8.3% a year earlier, supported by recovering utilities and faster construction growth. A 2.4% contraction in the mining sector held overall industrial growth at 7.7%. Strong output growth has yet to translate into sustained hiring: August’s manufacturing PMI numbers include the first decline in employment in two-and-a-half years.</p><p><strong>Watch out for: </strong>We expect industrial growth to moderate as softer orders and elevated energy costs weigh on manufacturing while public infrastructure spending supports construction. Sustained employment generation will depend on demand translating into capacity expansion and hiring.</p></li></ul> <ul><li><p><strong>Tertiary sector:</strong> Services remain India’s main growth driver, with the acceleration concentrated in financial, real estate, IT and professional services. Public administration and other services provided additional support and trade, hospitality, transport and communication lost momentum. Weakening international air traffic and declining rail freight volumes are contrasting with stronger domestic activity, highlighting an uneven expansion across services.</p><p><strong>Watch out for:</strong> We expect services to remain in pole position, but sustaining Q1’s double-digit pace will be difficult. August’s improvement in business activity and hiring supports continued expansion, but new-business growth remained subdued. Sustained demand will be essential for the stronger hiring momentum to continue</p> </li></ul>.<p><em><strong>What are Lead Indicators saying?</strong></em></p>.<p><strong>Manufacturing employment fell for the first time in two-and-a-half years, while services job creation reached a 15-month high.</strong> </p><p>Softer cost pressures helped manufacturers limit price hikes, while services inflation edged up modestly.</p> <p><strong>Watch out for:</strong> We expect manufacturing and services activity to continue expanding, but growth will hinge on improving order books. Unsold inventories could restrain manufacturing output, while services firms need sustained new business to maintain their recent improvement.</p>.<ul><li><p><strong>Credit growth has broadened across sectors.</strong> Non-food credit growth rose to 19.1% in July, its fastest since May 2024, and almost double the pace a year earlier. Lending to services, industry and agriculture all accelerated.</p></li><li><p>Lending to industry grew by 20%, its strongest since January 2019, while that to services grew by 22.9%. Both have accelerated since the start of FY27. Overall credit demand is expected to remain healthy through FY27, with growth projected at 15–16%.</p></li></ul>.<p><em><strong>Investment - Picking Up</strong></em></p>.<p><em><strong>Consumption - Holding Up, For Now</strong></em></p>.<p>Household demand remains uneven across categories. Vehicle sales reached record highs in April–July 2026, supported by lower GST rates and strong domestic demand, while domestic air passenger traffic grew just 1.7%.</p><ul><li><p>Passenger car sales surged by 26.4% in July, but the sector is seeing large month-on-month variations, with June sales growing by just 2.4%. Two-wheeler sales have been more consistent, growing 23.7% in July, marking 9 consecutive months of double-digit growth.</p></li><li><p>FMCG demand weakened in Q1 with NielsenIQ reporting value growth of just 0.8%, while volumes contracted by 2%. Urban FMCG volumes were broadly flat while rural volumes declined by 5%, with the weakness concentrated in traditional trade even as modern trade and e-Commerce remained resilient.</p></li><li><p>Consumer borrowing is a mixed bag. Personal loan growth has been broadly steady since the start of FY27, while credit card purchases appear to be slowing. Consumer durables lending edged up 0.4% after 8 consecutive months of contraction. </p> </li><li><p><strong>Watch out for:</strong> Festive spending should support household demand but the recovery is likely to remain uneven. According to a widely tracked RBI survey, consumer expectations for the year ahead have weakened for 3consecutive survey rounds, pointing to rising caution around spending. A pick-up inflation and weather-related disruptions present further risks, particularly to rural consumption, where optimism has deteriorated more sharply.</p></li></ul>.<p><em><strong>The Fiscal Position - Emerging Risks</strong></em></p>.<p>The Centre targets a deficit of 4.3% of GDP in FY27, alongside a reduction in its debt-to-GDP ratio to 55.6%, from 56.1% in FY26, and towards 50% ±1 percentage point by March 2031. As of July, the deficit stood at 26.8% of the annual target, below last year’s 29.9%, despite capital expenditure growing 30%.</p><p><strong>Watch out for: </strong>We expect the Centre’s fiscal deficit to close FY27 at around 4.4% of GDP, marginally above the 4.3% target. Strong tax collections should limit slippage, although weaker excise and personal income-tax receipts and additional subsidy pressures from elevated commodity prices remain key risks. Tax revenues will need to grow more sharply than expected for the Budget estimates to be met. </p>.<p><em><strong>Inflation and Interest Rates: On the Rise</strong></em></p>.<ul><li><p><strong>Headline inflation </strong>has moved decisively past the RBI’s 4% target while underlying demand pressures remain contained.</p></li><li><p><strong>Core inflation has stayed relatively stable</strong>, partly due to the lingering favourable base effect of the September 2025 GST cuts and declines in gold and silver prices over Feb–Jul. Core inflation is expected to moderate in the near term (the RBI currently projects it at 4.3% for FY27 as a whole), underpinned by limited demand-led price pressures.</p></li><li><p><strong>The MPC held the repo rate at 5.25% and retained a ‘neutral’ stance at its August 2026 meeting.</strong> The RBI trimmed its FY27 inflation forecast to 5% from 5.1%. It also lowered Q2 headline inflation to 4.7% from 5.1%, retained Q3 at 5.9% and raised Q4 to 5.5% from 5.4%, with Q1FY28 at 5.3%.</p></li><li><p><strong>However, the RBI flagged the monsoon and global prices as key risks ahead.</strong> A deficient, uneven monsoon threatens the kharif output, while global commodity prices and exchange rates remain key risks. </p></li><li><p><strong>Watch out for:</strong> A Fed rate hike could strengthen the dollar and place renewed pressure on the rupee, adding to imported inflation and narrowing the RBI’s room to keep rates unchanged. </p></li></ul>.<ul><li><p><strong>WPI inflation averaged 9.5% in the first fourth months of FY27</strong>, compared with a 0.2% decline a year earlier, highlighting the sharp reversal in price pressures.</p></li><li><p><strong>The WPI base year has been moved from 2011–12 to 2022–23.</strong> The government plans to phase out the WPI over roughly five years, with the transition following international practice and IMF recommendations.</p></li><li><p><strong>The new Producer Price Index (PPI) tracks prices received by producers</strong>, extending coverage to services and including export prices. The WPI uses ex-factory prices for manufactured goods, excluding transport charges and GST; PPI’s broader coverage improves the measurement of producer prices and the adjustment of national accounts for inflation.</p></li><li><p><strong>Oil prices have risen again</strong>, with Brent near $108 a barrel after attacks left Saudi Arabia’s East-West pipeline offline and heightened risks to Gulf and Red Sea shipments. With India’s crude import bill already sharply higher, sustained price pressures could widen the current account deficit, squeeze corporate margins and household purchasing power and further limit the RBI’s room to cut rates.</p></li></ul>.<p><em><strong>The External Sector: On a Knife's Edge</strong></em></p>.<p><strong>A Widening Current Account</strong></p>.<ul><li><p><strong>Merchandise trade:</strong> Exports rose by 17% to $174 bn in Apr-Jul but imports increased 19% to $292 bn, widening the deficit from $97 bn to $119 bn. Diversification beyond the US is supporting exports, but tariff-related uncertainties and weakening global growth remain headwinds. Elevated oil and electronics prices, higher Chinese producer prices and shipping disruptions will push up India’s import bill.</p></li><li><p><strong>Services trade:</strong> Exports grew by 8.8% to $143 bn in the first 4 months of the fiscal year, supported by computer, business and transportation services. However, imports grew by a faster 10%, to $73.5 bn. The services surplus is thus growing more slowly than the merchandise deficit, worsening the overall BoP situation. Uncertainty over global technology spending could constrain future export growth.</p></li><li><p><strong>Current account:</strong> In Q1 (Apr-Jun) India’s CAD widened to $4.2 billion, or 0.5% of GDP, from 0.4% a year earlier. Higher services earnings and remittance receipts cushioned the deterioration in merchandise trade.</p></li><li><p><strong>Watch out for:</strong> We expect the CAD to widen to around 1.4% of GDP in FY27 as import growth continues to outpace exports. A slow-growing or even narrowing services surplus will add to external pressures, which include elevated oil prices and shipping disruptions.</p></li></ul>.<p><strong>Pressures on the Capital Account Side</strong></p>.<p><strong>Watch out for:</strong> A potential Fed rate hike, elevated US bond yields and higher oil prices could keep portfolio flows volatile and pressure the rupee. FDI inflows will need to sustain at the Q1 rates to have a meaningful impact on the overall capital account position.</p>.<p><strong>Downward Pressure on the Rupee </strong></p>.<ul><li><p>RBI dollar sales and foreign-currency deposits from NRIs have helped limit near-term rupee depreciation but a full-scale reversal remains unlikely. Higher oil prices raise India’s import bill and dollar demand, while elevated US yields, dollar strength and foreign equity withdrawals constrain possible gains. Renewed West Asia tensions and shipping disruptions remain key risks, making the outlook sensitive to oil prices and capital flows. </p> <p><strong>Watch out for: </strong>We expect the rupee to trade in a 95–97/$ range through FY27. Continued RBI intervention will help contain volatility. </p></li></ul>
