Strong Q2 growth beats RBI expectations India’s gross domestic product expanded by **7.8%** in the quarter ending June, considerably above the Reserve Bank of India’s (RBI) 7% forecast for FY2026‑27. The surge was anchored by robust consumer spending and a front‑loaded manufacturing cycle, while fiscal measures such as GST and excise‑duty cuts, higher subsidies and a **40% YoY rise in public capital expenditure** added further momentum.
Implications for monetary policy HSBC Global Investment Research interprets the data as a signal that the RBI can afford a **gradual tightening** path. The firm projects two **25‑basis‑point** hikes in the repo rate during FY27, lifting the benchmark to **5.75%**. This outlook rests on the combination of stronger‑than‑expected growth and inflation that the RBI expects to stay above **5%** for the next three quarters.
Inflation trajectory and price pressures The research note expects headline inflation to hover close to the RBI’s **4% target** in the first half of FY27, before climbing in the latter half. Over the next nine months, average inflation is projected to exceed **5%**. Recent rebounds in Brent crude prices and the anticipated strengthening of **El Niño** conditions in the December quarter could lift food‑price inflation, while higher input costs may be passed on by firms, pushing core inflation toward **5%** by FY27’s end.
Liquidity management and fiscal backdrop To mop up the excess liquidity generated by foreign‑currency non‑resident (FCNR‑B) deposits, the RBI is expected to **absorb Rs 5‑6 trillion** through open‑market‑operation sales. On the fiscal side, the current‑account deficit is likely to widen to **1.3% of GDP** in FY27, up from **0.6%** in FY26, mainly due to rising oil bills and imports of electronics and other core goods. The central government’s fiscal deficit may also be **0.5% of GDP** higher than the budgeted figure as spending rises to mitigate the energy‑price shock.
Outlook for growth and risks HSBC projects overall GDP growth of **7.2%** for FY27, suggesting a gradual softening rather than a sharp slowdown. The slowdown is attributed to a high base effect, a tapering of public‑capital spending, weaker sowing conditions, deficient rainfall and the fading impact of GST cuts. Monitoring these variables will be crucial for assessing whether growth can sustain its current pace.
--- **Why it matters**: The divergence between actual growth and RBI forecasts strengthens the case for a measured rate‑hike cycle, which will influence borrowing costs, investment decisions and the broader inflation outlook. A widening current‑account deficit and higher fiscal outlays also raise questions about external vulnerability and debt sustainability.
**What to watch**: Future RBI policy statements, actual inflation readings in the second half of FY27, oil price movements, and the pace of public‑capital expenditure will be key indicators of whether the projected rate hikes and liquidity absorption materialise as expected.