MUMBAI: Forecasting for a 7.4% clip in economic expansion this fiscal, India Ratings sees the economy printing in 6.9% next fiscal, buoyed by domestic reforms that will help it tide over the many global headwinds, especially those arising from the steep 50% tariffs in exports to the US along with the falling rupee, which it sees averaging around 92.26.
“The economy is likely to grow 6.9% in FY27, down from 7.4% in the current fiscal. We believe domestic reforms, including the income tax cut in the FY26 budget, the recent GST rate cuts and foreign trade agreements with Oman, England, and New Zealand, will help the economy withstand global uncertainties caused mainly by the US tariffs,” Devendra Kumar Pant, the chief economist at India Ratings, told reporters in a conference call Tuesday.
But he warned of many downsides to this projection such as a likely El Niño pattern from mid-2026, the weakening rupee which is primarily due to weak capital flows, sluggish global trade growth, base effect of a strong growth in FY26, and slower growth GST collections. Another emerging headwind is artificial intelligence.
These risks to FY27 growth are evenly balanced. A faster trade deal with the US and also a favourable Indian Ocean Dipole may help minimise the impact of the likely El Niño pattern, pushing growth above this estimate, he added.“However, if demand revival (consumption and investment) is weaker than expected, growth could decline. While rural demand has remained resilient, urban demand is a drag on the overall consumption demand,” he warned.
Forecasting tougher days for the rupee, Pant expects the domestic unit, which had lost more than 5% in 2025 to go further down, and average at 92.26 next fiscal.“The rupee is likely to average at 92.26 in FY27 from 88.64 in FY26 an 84.58 in FY25,” Pant said. Though Pant noted that the five consecutive quarters (Q2FY25-Q2FY26) of agricultural GVA growth exceeding 3.5% and the decline in inflation in FY26 have enhanced the scope of a sustained consumption demand, government consumption expenditure has been muted due to fiscal consolidation.
Key factors for a strong consumption demand are strong services growth, low inflation leading to real wages turning positive, income tax cut announced in the FY26 budget, and GST rate cuts.
On the inflation front, Pant’s price outlook in the rest of FY26 and FY27 is benign. Stable agriculture growth and low inflation are likely to keep rural real wages of agriculture in positive territory, supporting consumption growth in FY27. Low inflation should also maintain real minimum urban wages growth positive, and real wages in non-financial private corporates are likely to rise from the present level 9.6%.
Income tax cut announced in the FY26 budget and the recent GST rate cuts will improve disposable income and help sustain consumption demand, he said. On the capex side, he expects gross fixed capital formation or GFCF to clip at 7.8% in FY27, up from 7.4% in FY26 and 7.1% in FY25, due to sustained government capex.
After private private final consumption expenditure or PFCE, the GFCF is the second-largest component of GDP from the demand side. While telecom, chemicals, and garment exporters may face a capex slowdown, oil & gas and real estate in the metros are likely to have flattish capex growth, while power (thermal and renewables), transmission & distribution, logistics, warehousing, and commercial, and retail real estate may continue their capex growth momentum.
Stating that the actual impact of the 50% US tariffs is lower than earlier estimates, Pant pointed to the IMF forecast of global growth of 3.2% in 2025 more than the previous forecasts of 3.3%, 2.8% and 3% in January, April and July 2025, respectively as against the 2024 growth of 3.3%. The weighted average tariff on goods imported by the US rose to 18.55% as of December 2025 from 2.56% on January 1, 2025.
Tariffs on goods imported from countries such as Brazil, China, and India range between 1.8x-2.3x of the weighted average tariffs now.For us, the weighted average tariff rose to 38.67% by December from 2.43% in January 2025. These tariffs are unlikely to come down to the January 2025 level even with a trade deal. Globally, trade worth $2.7 trillion has been affected by these tariffs, while $74.33 billion worth of our exports are affected.
Forecasting for a benign inflation in FY27, which will be within RBI’s target, Pant expects the average CPI and WPI come in at 3.8% and 2.3%, respectively in FY27, up from 2.1% and 0.3% respectively in FY25 and 4.6% and 2.3% in FY25. Retail and wholesale inflation averaged 1.8% and a -0.1%, respectively, in the first eight months of FY26.
