India’s Q1FY27 growth seen resilient at 7-7.7%, but inflation, rate risks cloud H2 outlook

India’s economy is likely to have remained resilient in the April-June quarter (Q1) of FY27, with consumption, investment, and industrial activity holding up despite weak monsoons, geopolitical disruptions, and higher crude oil prices, according to reports by SBI Research and YES Bank.

Ahead of the GDP data due on August 31 (Monday), SBI Research estimates India’s GDP growth at 7% in Q1FY27 while YES Bank has raised its estimate to 7.7% from 7.1% earlier. YES Bank also upgraded its full-year FY27 growth forecast to 6.8% from 6.6%, above the Reserve Bank of India’s latest projection of 6.7%.

The estimates suggest India’s growth momentum has remained stronger than initially expected despite heightened global uncertainty following the West Asia conflict.

SBI Research said the global economy remains on an uneven recovery path, with the US economy slowing unexpectedly in the April-June 2026 quarter, while India’s growth momentum appears to be strengthening.

Rural demand remains resilient

Private consumption and investment remained key drivers of economic activity in Q1FY27. Consumption continued to benefit from the momentum generated by GST rationalisation since Q3FY26, with little evidence that weak rainfall or concerns over an El Niño event have significantly dented rural demand.

Retail tractor sales grew by an average 23% in Q1FY27 while retail two-wheeler sales rose 15.7%, pointing to sustained rural consumption. Personal loans grew 15.8% year-on-year as of June 2026, led by housing and vehicle loans.

Credit extended by housing finance companies, net of bank borrowings, grew 9.4% as of July 31, 2026, compared with a contraction of 4.3% in the corresponding period last year. Housing and education loans under the priority sector also recorded strong growth of 21.3% and 22.3%, respectively.

GST collections rose 8.6% year-on-year in Q1FY27, accelerating from 7.7% growth in the previous quarter, further underscoring the strength of domestic consumption.

Investment and industrial activity strengthen

Investment indicators also remained encouraging. Capital goods imports surged 38.7% in June 2026, pointing to continued investment demand, potentially supported by government spending.

Industrial activity accelerated despite supply-chain disruptions linked to the West Asia crisis. Industrial production grew at an average 5.7% in Q1FY27, improving from the previous quarter, with capital goods production providing a key impetus.

Consumer durables production rose 7.1%, sharply higher than the 2.1% growth recorded in Q4FY26. GST e-way bill generation also remained robust, growing 15.8% in Q4FY26 and 12.4% in Q1FY27.

International cargo and port traffic continued to show strength, while improving credit growth to the industrial sector, including large industries, pointed to sustained economic activity.

Higher crude prices widen trade deficit

The external sector, however, remained a concern, with the merchandise trade deficit widening in Q1FY27, largely due to higher oil prices. While nominal export growth remained firm, the higher oil import bill could put pressure on growth. Elevated energy prices also pose risks to corporate profitability and inflation.

YES Bank said corporate profits remained resilient in Q1FY27, partly because companies may still have been operating with inputs procured under contracts agreed before the recent rise in global commodity prices.

The rupee has also remained under pressure. SBI Research noted that the currency has depreciated 11.26% since April 1, 2025. After weakening during the escalation of the US-Iran conflict, the rupee has recovered since July 27, gaining around 1.2% from its July 24 level.

Growth likely to moderate in H2

Despite the strong start to FY27, YES Bank expects growth momentum to moderate in the second half of the fiscal year as inflationary pressures build. Rising retail prices could weaken real wage growth as higher input costs are gradually passed through to consumers. Survey-based indicators are also showing signs of caution, with both rural and urban consumer confidence indices softening.

Manufacturing and services PMI readings remain in expansion territory but have moderated. YES Bank expects GDP growth at 7.3%-7.5% in H1FY27, compared with 6.2%-6.4% in H2FY27. The bank’s full-year growth forecast has consequently been revised to 6.8%-6.9%, from 6.6% earlier.

RBI rate hike remains a possibility

The resilience of economic activity could give the RBI greater room to tighten monetary policy if inflationary pressures become more broad-based.

YES Bank expects the central bank to remain cautious and does not anticipate a rate hike in October but assigns a 20%-30% probability of a rate increase in December. The bank said continued growth resilience, including early signs of sustained rural demand in July, could give the RBI greater confidence to raise rates without significantly undermining economic activity.

Economy weathers geopolitical shocks better than feared

Radhika Rao, Executive Director and Senior Economist at DBS Bank, said the expected Q1FY27 growth performance suggests the Indian economy has weathered geopolitical disruptions better than initially anticipated.

“Our consolidated consumption gauge strengthened during the quarter, even as sentiment indicators, including the Economic Policy Uncertainty Index, pointed to a more cautious backdrop and wealth effects remained muted amid mixed asset market performance,” Rao said. She said industrial activity accelerated, although demand for industrial fuels and downstream petroleum products remained soft following a series of price adjustments.

The services sector continued to support growth, with robust bank credit expansion, expansionary PMI readings, higher e-way bill generation, and resilient exports. Corporate earnings indicators also remained broadly constructive, with aggregate revenue growth among listed companies holding up, although higher energy prices weighed on the profitability of oil marketing companies.

Rao added the external sector presented a mixed picture, with the higher oil import bill putting pressure on the goods trade balance even as nominal export growth remained steady.