RBI raises FY27 GDP growth projection to 6.7%; cuts inflation outlook to 5%

The Reserve Bank of India (RBI) on Wednesday maintained the status quo in its August monetary policy review, keeping the benchmark repo rate unchanged at 5.25% and retaining its neutral stance. At the same time, the central bank raised its FY27 real GDP growth forecast by 10 basis points to 6.7% and lowered its consumer inflation projection by an equivalent margin to 5%, signalling confidence in the resilience of the domestic economy despite heightened global uncertainties.

The RBI now expects the economy to grow 6.7% in FY27, up from its earlier estimate of 6.6%, while projecting CPI inflation at 5%, down from the 5.1% forecast in the June policy review.

The central bank expects headline inflation to rise in the coming months and peak in the third quarter, largely due to food and fuel prices, before easing in the second half of the financial year.

Upgrades growth outlook despite global headwinds

Announcing the policy decision after the three-day MPC meeting, RBI Governor Sanjay Malhotra said the Indian economy continued to display resilience, supported by robust domestic demand, sustained expansion in manufacturing and services, healthy exports and steady investment activity. However, he cautioned that while the risks to growth and inflation remain evenly balanced, the outlook continues to be clouded by uncertainties surrounding the southwest monsoon, geopolitical tensions in West Asia, global trade policies and commodity price volatility.

"The Indian economy has remained resilient amidst persisting global headwinds. High-frequency indicators available so far point towards steady domestic demand in Q1 FY27. Private consumption remained robust, while investment continued to stay resilient, as reflected in construction activity, capital goods production and bank credit," Malhotra said.

Taking these factors into account, the RBI projected real GDP growth at 7% for Q1, 6.4% for Q2, 6.5% for Q3 and 6.8% for Q4 of FY27, with growth for the first quarter of FY28 estimated at 7.3%.

Monsoon, geopolitics, oil prices cloud inflation outlook

On inflation, Malhotra noted that CPI inflation rose to 4.4% in June after remaining below the RBI's 4% target for 16 consecutive months, but still came in 30 basis points below the central bank's earlier projection. The increase was largely driven by food and fuel prices, while core inflation remained contained.

"Despite higher input costs, core inflation remained unchanged at 3.9% during May and June. Excluding precious metals, core inflation remained even lower at 2.3-2.5%, indicating that underlying price pressures remain benign," he said.

Looking ahead, the RBI warned that the uneven distribution of rainfall under El Niño conditions, coupled with volatile crude oil prices amid geopolitical tensions, could keep inflation risks elevated. However, proactive supply-side measures and adequate foodgrain stocks are expected to cushion the impact.

The central bank now projects CPI inflation at 4.7% in Q2, 5.9% in Q3 and 5.5% in Q4 of FY27, with Q1 FY28 inflation estimated at 5.3%. Core inflation for FY27 is projected at 4.3%, while core inflation excluding precious metals is expected to remain lower in the near term, suggesting demand-side price pressures are still contained.

MPC sticks to wait-and-watch approach

Summing up the MPC's assessment, Malhotra said the expected rise in headline inflation is largely being driven by supply-side shocks in food and fuel rather than broad-based demand pressures. At the same time, although growth remains resilient, uncertainties surrounding the southwest monsoon, El Niño, geopolitical developments and global trade policies warrant caution.

"There is a need for greater clarity, especially regarding inflation, its trajectory and composition, before taking any policy action. Any future move will have to be calibrated in line with the evolving growth-inflation dynamics," he said.

The six-member MPC unanimously voted to keep the repo rate unchanged at 5.25% and retain its neutral stance for the fourth consecutive bi-monthly policy review. Accordingly, the Standing Deposit Facility (SDF) rate remains at 5%, while the Marginal Standing Facility (MSF) rate and the Bank Rate continue at 5.5%.

The decision was widely in line with market expectations, with economists anticipating that the RBI would extend its pause on rates while maintaining a data-dependent, wait-and-watch approach amid an uncertain global backdrop.