India: Growth, liquidity and policy response
Sustaining strong 1Q performance will depend increasingly on how effectively India navigates an uncertain global environment.
Group Research - Econs, Radhika Rao22 Sep 2026
  • High frequency indicators might keep 2QFY growth close to 7%.
  • Pace to moderate in 2HFY.
  • Retail inflation is likely to continue rise and broaden in scope, necessitating a tighter policy bia
  • Special swap windows helped to stem bearish INR positioning.
  • Organic capital flows need to catch up.
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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. In the near-term, priorities will be to manage liquidity, gradually lower the sizeable forwards book, and support the domestic currency. Long-end yields continue to be influenced by the hardening global yields.

The economy exhibited resilience in the face of a tough external environment in the first quarter, with part of that stability likely to extend to 2QFY27 as well. Tighter monetary conditions, El Nino impact and base effects from passage of post-indirect tax jump will moderate headline growth in 2HFY. Nonetheless for the year, we expected growth to stay north of 7%, factoring in a strong start.  

This is a summary of the report, download the PDF for the full report

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

 
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