India's GDP Could Return To 7% Plus Growth If Oil Prices Stay Low

India's economic growth rate could exceed the Reserve Bank of India's (RBI) current projection of 6.6% for FY27 and return to the 7% plus range, provided the West Asia peace holds and crude oil prices continue their downward trajectory, according to Nagesh Kumar, external member of the Monetary Policy Committee (MPC).

Kumar shared his views in a note accompanying the June MPC minutes, saying the macroeconomic picture had improved considerably since the committee's meeting on 03 to 05 June.

The economy had already grown at 7.7% in the January to March quarter, slightly above earlier estimates, and subsequent developments had added further momentum to the outlook.

What Has Changed Since The June Meeting

Three developments have materially improved the picture:

• Brent crude fell from around $110 to $115 a barrel during the West Asia conflict to below $80 after the peace accord was signed.

• The Reserve Bank of India introduced measures to attract foreign currency deposits, helping stabilise the rupee.

• The government moved on taxation of investments in government securities to encourage foreign capital inflows.

Softer oil prices ease pressure on multiple fronts simultaneously. They reduce the import bill, compress inflation, ease the current account deficit and give the rupee room to stabilise without heavy central bank intervention.

Kumar said these factors together create downside potential to the Reserve Bank of India's existing 5.1% Consumer Price Index (CPI) inflation projection, which was made before the peace deal and exchange rate stabilisation measures were in place.

Fiscal Space And Trade Tailwinds

Kumar pointed to two additional factors supporting the growth case. India's fiscal consolidation has brought the fiscal deficit down from 6.5% of gross domestic product (GDP) in FY23 to 4.4% in FY26, giving the government room to sustain public investment even if private consumption or investment faces temporary headwinds from supply chain disruptions or higher costs.

Recently signed free trade agreements with the European Union, the United Kingdom and other countries could also open new export markets for Indian goods, particularly in labour-intensive sectors, partially offsetting any weakness in global demand.

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Where The Risks Remain

Kumar did not dismiss the risks entirely. Food inflation is the main concern, with El Niño conditions potentially weakening the monsoon. He acknowledged that the outcome could put upward pressure on food prices. However, he said higher reservoir levels heading into the season and improving agricultural resilience could limit the damage.

Hence, Kumar's note suggests that if the current improvement in external conditions is sustained, the committee may have room to reassess both its growth and inflation projections at the next meeting.

Sources:

The Economic Times

Financial Express