India's economy is projected to grow at an average of 7.3 per cent in FY27, according to Radhika Rao, Senior Economist and Executive Director at DBS Bank, who cited resilient domestic demand and strengthening capital flows as key supports. The forecast comes as Q1 FY27 growth already clocked in at a robust 7.8 per cent year-on-year, providing a strong base for the fiscal year.

Strong Start, But Headwinds Ahead

India entered FY27 with considerable momentum, buoyed by solid consumption, sustained public capital expenditure, and a pick-up in manufacturing activity. High-frequency indicators — including GST collections, e-way bills, electricity demand, and digital payments — have continued to hold up, painting a broadly positive near-term picture.

However, Rao cautioned that growth is expected to moderate in the second half of FY27. 'Tighter financial conditions, elevated energy prices and base effects weigh on momentum,' she noted, signalling that the pace set in Q1 is unlikely to be sustained through the full year.

Inflation Above 5% Seen in H2 FY27

Inflationary pressures have emerged as a central concern. August inflation climbed to 4.8 per cent, with price rises spreading across food categories — including sugar, milk, protein groups, and edible oils — as well as energy and transport. Below-average monsoon rainfall and strengthening El Niño risks could further squeeze crop output in coming months.

Against this backdrop, DBS Bank expects headline inflation to remain above 5 per cent in the second half of FY27. This, Rao said, will keep monetary policy closely focused on inflation risks, leaving limited room for the Reserve Bank of India (RBI) to ease rates in the near term.

Foreign Inflows Strengthen Buffers, Create Liquidity Challenge

A surge in foreign-currency inflows has simultaneously bolstered India's external resilience and complicated liquidity management for the central bank. The RBI's special swap windows have raised a substantial $143 billion — including $133 billion through FCNR (B) deposits — pushing foreign exchange reserves above $780 billion.

The flip side is a sharp rise in banking-system surplus liquidity, which the RBI has had to manage through tools such as Variable Rate Reverse Repo (VRRR) auctions and open-market operations to contain the impact on yields. Notably, this liquidity overhang adds another dimension to the central bank's already delicate inflation-versus-growth balancing act.

External Account and Key Risks to Watch

On the external front, DBS forecasts the FY27 current account deficit at around 1.1 per cent of GDP, a manageable level by historical standards. The balance of payments is expected to remain in surplus, supported by continued capital inflows.

Rao highlighted four critical variables that will shape India's economic trajectory in the months ahead: the inflation path, liquidity management by the RBI, global energy price movements, and whether organic capital flows can sustain momentum once the impact of the special swap arrangements fades. Markets and policymakers alike will be watching each of these closely as FY27 progresses.