Inflation To Move Up Above 4 PC in FY27, GDP Growth To Ease to 6.5 PC

Chennai: According to rating agencies, CPI inflation is expected to rise to 4.1-4.3 per cent in FY27 as the West Asian crisis impacts fuel prices and availability. GDP growth may also decline from 7.5 percent estimated in FY26 to 6.5 percent in FY27.

The ongoing conflict in West Asia has led to an increase in energy prices and affected availability; This could lead to higher inflation, affecting consumer demand.

Average CPI inflation is expected to more than double to 4.3% in FY 2027 from the 2.1% projected for FY 2026; Risks are moving to the upside due to the extent of revision in retail fuel prices and potential El Niño developments in the second half of the financial year. Moreover, according to ICRA, WPI inflation is expected to rise from 0.7% estimated in FY2026 to 3.5% in FY2027, driven by rising global energy and commodity prices.

According to India Ratings, FY27 inflation is estimated to average 4.1 per cent, with possible increases of over 4 per cent in the first and third quarters. If the entire increase in crude oil prices is reflected, inflation can rise to 6.9 percent, if half is reflected, inflation can rise to 5.1 percent, and if one-third is reflected, inflation can rise to 4.6 percent. Overall, if high prices and supply problems persist, the government is likely to pursue a pricing policy that will see inflation in the 4.0 percent to 4.5 percent range.

Additionally, high fuel prices can also affect GDP growth. Assuming an average crude oil price of $85/bbl in FY2027, ICRA projects real GDP growth to fall to 6.5 per cent in FY2026 from 7.5 per cent projected for FY2026. In nominal terms, GDP growth (on a 2022-23 basis) is projected to improve to ~10.5% in FY2027 from 8.6% projected for FY2026, amid expected recovery in WPI and CPI inflation compared to FY2026.

Reduction of US tariffs, increase in Central Government investment expenditure, positive outlook for domestic consumption due to falling GST rates, interest rate cuts, weak food inflation bode well for the growth outlook. However, ongoing conflict in West Asia has led to a rise in energy prices and affected availability; This could harm corporate profitability and lead to higher inflation, affecting consumer demand.

Higher global energy prices will negatively impact the fiscal deficit in FY2027 due to increased fertilizer and fuel subsidy requirements, lower dividend payments by oil marketing companies (OMCs), and lower consumption tax and corporate tax collections. ICRA expects upside risks to its baseline projection of fiscal deficit at 4.5 percent of GDP in fiscal 2027 against the Budget Estimate of 4.3 percent.