Mumbai, Jan 30 (NationPress) India has the potential to maintain its “J‑curve” gains despite the depreciation of the rupee, provided that trade diversion is established within resilient supply chains and accompanied by improvements in logistics, according to a report released on Friday.

The analysis from Emkay Global Financial Services emphasizes the importance of maintaining moderate tariffs on capital goods and intermediary products, alongside consistent long-term FDI, to uphold these gains. These elements are expected to play a more significant role than tariffs in the medium term.

The report forecasts a current account deficit of 1.3 percent of GDP for FY27, with the exchange rate of USD/INR projected to fluctuate between 87 and 95. Additionally, it anticipates the yield on 10-year government bonds to conclude FY26 at approximately 6.50 percent and FY27 at around 6.25 percent.

Furthermore, the firm predicts that the FY27 Union Budget will adhere to a path of “calibrated fiscal consolidation”, with the government transitioning its fiscal focus to debt-to-GDP.

The ‘Budget 2026’ is expected to balance fiscal prudence, support for growth, and the continuity of reforms, all while ensuring India’s medium-term macroeconomic stability, as per their predictions.

The RBI is anticipated to play a crucial role in balancing bond demand and supply to enhance monetary transmission, especially given that FY27 is likely to witness a third consecutive balance of payments deficit estimated at $15 billion, as highlighted by the report.

Additionally, the report forecasts open market operations to reach around Rs 5 trillion in FY27.

“Although the RBI’s sizable unsterilized FX interventions recently have reduced liquidity, the past accumulation of a significant net dollar short position” is putting pressure on both the foreign exchange and fixed-income markets, the report states.

It also estimates further primary liquidity injections of about Rs 1.5 trillion for the remainder of FY26.

The government is likely to target a gross fiscal deficit of 4.3 percent of GDP, with capital expenditure around 3 percent of GDP and gross tax revenue growth projected at 8.2 percent, the report indicates.

“Despite the challenging macroeconomic environment, fiscal consolidation is expected to proceed at a measured pace. The shift towards debt-to-GDP as a guiding metric reflects the government’s commitment to prioritize medium-term debt sustainability without stifling growth,” stated Madhavi Arora, Chief Economist at Emkay Global Financial Services.

aar/na