OECD Raises India's FY27 Growth Forecast To 6.3% But Flags Energy Shock And Inflation Risks

India's growth forecast for FY27 has been nudged up by the Organisation for Economic Co-operation and Development (OECD), but the upgrade comes with caveats. The Paris-based organisation now expects the Indian economy to grow 6.3% in the current financial year, 20 basis points above its earlier March projection of 6.1%.

Despite the revision, growth is still expected to slow sharply from 7.6% in FY26, as higher energy costs, gas rationing and weaker global demand take their toll. India is expected to remain among the world's fastest-growing major economies, with growth projected to pick up slightly to 6.4% in FY28 as conditions stabilise, the OECD said in its latest Economic Outlook report.

Inflation Heading Higher

The OECD expects inflation to jump to 4.8% in FY27 from just 2.1% in FY26, driven by rising food and energy prices and a weaker rupee that is making imported goods more expensive. However, this is slightly better than the 5.1% the organisation had projected earlier. Inflation is expected to ease back to 4% in FY28 as commodity prices cool and monetary policy does its work.

Private consumption growth is forecast to moderate to 6.8% in FY27 from 8.2% in FY26, as rising prices chip away at household purchasing power. Investment is also expected to slow, with gross fixed capital formation growth easing to 6% from 7.1% the previous year.

RBI Rate Hike On The Cards

Against this backdrop, the OECD expects the Reserve Bank of India (RBI) to raise the policy repo rate by around 25 basis points by the end of the June quarter to keep inflation within its 2% to 4% target band. The RBI's monetary policy committee is currently in its 3 to 5 June meeting, with the policy decision due on Friday.

The repo rate currently stands at 5.25%. The OECD expects this rate hike to be temporary and likely reversed in early FY28, leaving rates close to neutral levels over the medium term.

The Energy Dependence Problem

India imports more than 85% of its crude oil needs, with roughly half passing through the Strait of Hormuz, which has remained largely blocked since the Iran war began on February 28.

The OECD warned that prolonged disruptions to energy supply, including extended gas rationing, could further squeeze production and push inflation even higher, particularly through reduced fertiliser availability and lower agricultural output. India has already placed curbs on commercial cooking gas and redirected industrial fuel toward LPG production for domestic use.

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Fiscal Pressures Building

Energy support measures are expected to widen India's fiscal deficit by around 0.4% of gross domestic product (GDP) relative to the budgeted path. The current account deficit is expected to widen to 2.1% of GDP in FY27 as a result of higher energy import costs.

Public debt is forecast to rise to 54.7% of GDP by FY28. The OECD has recommended the government adopt targeted transfers, as opposed to broad-based price support, to minimise the fiscal impact while protecting household incomes.

The OECD expects world GDP growth to slow to 2.8% in 2026 from 3.4% in 2025, and could fall further to 2.1% if disruptions in the Middle East continue.

Sources:

Business Standard

The Economic Times