India Ratings Sees 2026-27 GDP Growth at 6.8%; Fiscal Deficit Target Challenging

India Ratings and Research expects India’s real GDP growth to slow to 6.8% in 2026-27 from 7.6% in 2025-26, citing elevated fuel and food inflation, a weaker rupee, geopolitical uncertainty and risks from an El Niño weather pattern.

The forecast is marginally higher than India Ratings’ May estimate of 6.7%, but below the National Statistical Office’s provisional 2025-26 growth estimate. India Ratings expect quarterly GDP growth at 6.9% in April-June, 6.6% in July-September, 6.7% in October-December and 6.9% in January-March.

The agency also said the government’s 2026-27 fiscal deficit target of 4.3% of GDP would be challenging, with higher LPG and fertiliser subsidies, possible excise duty cuts on petrol and diesel and monetary support to mitigate the impact of El Niño likely to put pressure on government finances.

“Higher inflation due to El Niño may limit growth upside from lower oil prices. The 2026-27 fiscal deficit target of 4.3% remains challenging due to subsidies on liquefied petroleum gas and fertilisers,” said Devendra Pant, Chief Economist and Head-Public Finance at India Ratings.

India Ratings expects the Indian crude basket to average $85/bbl in 2026-27, lower than its previous assumption of $95/bbl. The lower oil price assumption should support the trade and current account balances, although higher food inflation could offset some of the growth benefit.

The agency assumes the rupee will average 93.98/$ in 2026-27, representing a 6.4% year-on-year depreciation, and expects $70 billion of capital flows through FCNR(B) deposits and external commercial borrowings.

India Ratings forecasts nominal GDP growth at 10.4% in 2026-27 against 8.9% in 2025-26, with the GDP deflator rising to 3.4% from 1.1% due to higher inflation.

It expects average CPI inflation at 4.9% and WPI inflation at 8.5% in 2026-27, citing elevated food and energy prices. Food inflation is likely to remain under pressure at least through October due to the weak and uneven monsoon and adverse base effects.

The agency expects gross fixed capital formation growth at 8% in 2026-27, with government investment in physical infrastructure remaining a key driver. However, fiscal consolidation could constrain government capex if the West Asia crisis creates additional fiscal pressures.

India Ratings expects the 10-year government bond yield to remain around 7%, saying the recent fall below 7% has been supported by efforts to attract foreign currency inflows.

The current account deficit is projected to widen to 1.5% of GDP in 2026-27 from 0.6% in 2025-26, driven by higher energy import costs and rupee depreciation. India Ratings said downside risks include the unresolved West Asia conflict, high inflation, weaker global trade, lower government capex and the potential impact of a 100% US tariff on India linked to Russian crude purchases.