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India's economic growth is expected to slow significantly to 6.6 per cent in FY27 from an estimated 7.6 per cent in FY26, while headline consumer price inflation (CPI) is projected to average between 5.0 and 5.2 per cent, according to a research report by Yes Bank.
The report said inflation is likely to remain within the Reserve Bank of India's (RBI) tolerance band, but rising price pressures and slowing growth will pose challenges for policymakers. It expects the RBI to keep interest rates and its policy stance unchanged at the upcoming June meeting to assess the impact of recent price increases. "Balance of risks remain crucial; our inflation estimates indicate headline CPI to average around 5.0-5.2 per cent while growth is expected to slow sharply to 6.6 per cent in FY27 from 7.6 per cent estimated for FY26," the report said. According to Yes Bank, the domestic economy continues to face risks from geopolitical tensions and volatile commodity prices. The pass-through of higher wholesale prices to retail inflation has already begun, reflected in rising petrol, diesel and commercial LPG prices. Manufacturing and agricultural input costs have also increased, complicating the RBI's task of balancing inflation control with growth support. The projected slowdown in GDP growth is attributed to both domestic and global headwinds. Private consumption, which supported strong growth in FY26 through rising incomes and tax relief measures, is expected to weaken as inflation reduces household purchasing power. Private investment is also likely to moderate due to softer demand and higher operating costs. The report sees only a small chance of a rate hike in June, saying the RBI is likely to wait and evaluate the second-round effects of higher prices. It expects a cumulative rate hike of 75-100 basis points to begin in August or October after the monsoon's impact on food prices becomes clearer. Industrial activity, particularly among micro, small and medium enterprises (MSMEs), may face challenges due to supply-chain disruptions and dependence on imported crude oil. Rising fuel costs are also increasing financial pressure on sectors such as aviation and hospitality. Agriculture remains vulnerable to potential weather disruptions, with the possibility of an El Nino cycle affecting crop output and rural demand. Exporters are also facing weaker global demand and elevated freight and insurance costs. While the report noted that monetary policy has limited effectiveness in addressing supply-driven inflation, it warned that prolonged price increases could lead to higher wages and further inflationary pressures. Therefore, the RBI is expected to closely monitor inflation expectations to prevent price pressures from becoming entrenched. Although a June policy tightening appears unlikely given relatively stable core inflation, Yes Bank expects the RBI to begin raising rates later in the year as inflation risks persist and growth momentum weakens. (ANI)
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