The Reserve Bank of India has raised its gross domestic product growth projection for the financial year 2026-27 to 7.1 percent from 6.7 percent, reflecting firmer confidence in underlying economic momentum despite persistent inflationary pressures and global headwinds. The upward revision is underpinned by sustained domestic consumption, resilient fixed investment, and expanding services activity, even as volatile global crude oil prices, a weak monsoon, and El Nino risks pose continued challenges. The central bank noted that net exports have also made a positive contribution, while robust spending on plants, machinery, and fixed assets continues to create room for future production capacity.
Sharp Upward Revision Driven by Second Quarter Outlook
The upward adjustment in the full-year trajectory is primarily anchored by a significant upgrade in the outlook for the second quarter. The RBI lifted its GDP growth projection for the July to September 2026 period to 7.2 percent from 6.4 percent, marking an increase of 0.8 percentage points. For the October to December 2026 quarter, the estimate has been raised to 6.9 percent from 6.5 percent, while the projection for the January to March 2027 quarter has been held unchanged at 6.8 percent. For the first quarter of the subsequent financial year 2027-28, the central bank lowered its growth forecast to 7.1 percent from 7.3 percent.
High-frequency indicators suggest that while business activity remained solid through the second quarter, expansion moderated relative to the opening quarter. Both manufacturing and services Purchasing Managers’ Indices stayed comfortably in expansion territory, pointing to steady commercial health. Services activity continued to broaden across several segments, and fixed investment remained strong.
Urban Demand Anchored as Rural Economy Confronts Weather Risks
Urban demand continues to draw support from expanding services activity and broadly stable employment conditions. Conversely, the rural economic landscape faces heightened uncertainty linked to adverse weather developments. A deficient southwest monsoon combined with stronger El Nino conditions threatens the upcoming rabi cropping season, which could adversely affect rural incomes and demand. Signs of weakness have already surfaced across select fast-moving consumer goods segments and domestic passenger traffic.
Services exports are projected to remain a key growth driver, with recent bilateral trade pacts expected to offer incremental momentum to outbound shipments alongside domestic consumption.
Inflation Projections Revised Upward Across Quarters
Alongside higher growth targets, the RBI raised its consumer price index inflation forecast for the 2026-27 fiscal year to 5.2 percent from 5.0 percent. The second-quarter inflation projection was lifted to 4.9 percent from 4.7 percent, while the third-quarter forecast rose to 6.0 percent from 5.9 percent. Projections for the final quarter were revised to 5.7 percent from 5.5 percent, with the first quarter of 2027-28 pegged at 5.6 percent, up from 5.3 percent. Core inflation is projected at 4.4 percent. The central bank highlighted that weak rainfall, El Nino, and crude oil fluctuations remain primary risks to price stability.
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