India’s macroeconomic outlook could turn more challenging in 2026-27, with inflation expected to rise sharply and economic growth projected to moderate, even as easing geopolitical tensions and lower crude oil prices have improved several key indicators, according to a Crisil report published on Thursday.
Crisil expects retail inflation to rise to 5.1% in FY27, from 2% in FY26, as higher energy and input costs combine with weather-related risks to food prices. The agency also flagged the possibility of a below-normal monsoon and the emergence of El Nino conditions as potential risks to the inflation outlook.
Meanwhile, economic growth is projected to slow to 6.6% in FY27, from 7.7% in the previous fiscal, as rising input costs, softer global growth and weather-related disruptions weigh on economic activity. Against this backdrop, the Reserve Bank of India (RBI) is likely to adopt a cautious approach to monetary policy, with Crisil expecting the central bank to potentially consider a 25-basis-point rate hike in the second half of FY27.
Geopolitical easing, lower oil prices boost macro indicators
Despite the challenges ahead, Crisil reported that India’s macroeconomic indicators improved in June as geopolitical tensions eased and crude oil prices declined. The improvement followed the signing of a Memorandum of Understanding (MoU) between the US and Iran during the month, which helped stabilise geopolitical conditions, soften energy prices and improve investor sentiment.
In June, the Indian rupee also strengthened against the US dollar despite a broader appreciation of the US currency globally. The rupee gained 0.7% against the dollar, marking its first monthly rise in four months. The currency averaged Rs 95 per dollar in June, compared with Rs 95.6 per dollar in May.
Crisil attributed the rupee’s recovery to easing geopolitical tensions, lower crude oil prices and a reversal in foreign portfolio investor flows. Foreign portfolio investors recorded net inflows of $500 million in June, compared with net outflows of $3.1 billion in May. The turnaround marked the first month of net FPI inflows in four months.
Equity markets remain volatile
The improvement in external conditions, however, did not fully translate into a sustained recovery in equity markets. The Sensex and Nifty remained under pressure on an average basis during June, declining 0.4% and 0.6%, respectively. The decline was driven by continued concerns over economic growth and FPI outflows during parts of the month.
However, both benchmark indices recovered during the second half of June as geopolitical tensions eased and crude oil prices fell. The markets eventually ended the month higher on a month-end basis. The volatility showcased the competing forces likely to shape Indian markets in FY27. While lower oil prices and stronger foreign capital flows could support the economy, higher inflation, rising input costs and slower global growth could continue to weigh on investor sentiment.
Banking system liquidity tightens
Crisil also pointed to a moderation in surplus liquidity in the banking system. The RBI absorbed an average of Rs 80,000 crore in June, significantly lower than the Rs 1.6 lakh crore absorbed in May. The decline reportedly shows tighter liquidity conditions amid higher government cash balances and stronger credit growth.
The changing liquidity environment could become an important factor for monetary policy in the coming months, particularly if inflationary pressures begin to intensify.
FY27 outlook remains a balancing act
The outlook for FY27 is therefore likely to be shaped by a delicate balance between easing external pressures and rising domestic risks. Lower crude prices, a recovery in foreign portfolio flows and a more stable geopolitical environment could support the rupee, markets and overall economic sentiment. However, higher energy and input costs, food inflation risks and a potentially weaker monsoon could push inflation higher.
At the same time, economic growth is expected to moderate as global demand softens and domestic cost pressures increase.
