Twin shocks from the ongoing energy crisis and deficient rainfall could slow India’s real GDP growth to 6% in FY27 from 7.4% in FY26, according to a report released by HSBC on Monday. 

The brokerage also warned that rising inflationary pressures stemming from higher oil prices and El Niño-linked weather disruptions may force the Reserve Bank of India (RBI) to raise key policy rates twice during the current fiscal year. “Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP growth at 6% in FY27, lower than our previous year’s forecast of 7.4%,” the report said. 

HSBC cautioned that the emerging crises would significantly affect the formal economy, including rural households and small businesses. 

The RBI had projected India’s GDP growth at 6.9% for FY27 in its estimate released last month. 

The report noted that the ongoing conflict in West Asia has sharply pushed up crude oil prices, with Brent crude continuing to trade above $100 per barrel. 

HSBC economists said the combined impact of elevated energy prices, deficient rainfall due to El Niño conditions, and rising temperatures warranted closer monitoring of India’s macroeconomic outlook. 

“Our model suggests the El Niño-temperature channel can add 0.5 percentage point to inflation over a year,” the brokerage said, projecting headline inflation at 5.6% in FY27. However, it warned that inflation could exceed the RBI’s upper tolerance limit of 6% for at least two quarters during the fiscal year. 

Monetary policy review

The report expects the RBI to keep rates unchanged at its upcoming monetary policy review in June but projected rate hikes in the December and March quarters as inflation risks intensify. 

HSBC also said it has factored in a ₹7 per litre increase in petrol and diesel prices to ease financial stress on oil marketing companies, which are reportedly facing annual losses of nearly ₹30,000 crore due to elevated crude prices. 

If fuel prices are not raised, average inflation for FY27 could moderate slightly to 5.3%, the report added. 

The brokerage further argued that rising temperatures have become a more reliable indicator of food inflation than rainfall levels, partly because irrigation infrastructure has improved over time. “We find that the probability of high temperatures is stronger than the probability of low rainfall, and the quantum of temperature increase during El Niño years is also rising,” HSBC said. 

According to the report, tracking surface temperatures may now provide a better indication of future food inflation trends than monitoring rainfall alone. Citing historical patterns, HSBC said El Niño years are typically associated with weaker rainfall, higher temperatures, elevated food inflation and slower economic growth.