- India’s economic growth forecast slows to 6.6%.
- Weak investment and higher oil prices weigh.
- Economists expect Reserve Bank to hold rates.
- Rising energy costs increase inflation and growth risks.
India’s economic growth is expected to slow to 6.6% in fiscal year 2026-27 (FY2027) from an estimated 7.7% in FY2025/26, according to a Reuters poll of economists, as higher crude oil prices, weaker private investment and slowing business activity weigh on Asia’s third-largest economy.
While India is still projected to outperform the global economy where Moody’s Analytics forecasts GDP growth of 2.5% in 2026 economists say underlying domestic demand has weakened as corporate investment remains subdued and external risks intensify.
Foreign investment slump clouds growth outlook
India’s investment cycle remains under pressure after net foreign direct investment (FDI) inflows fell 96% in 2024-25, according to Reserve Bank of India (RBI) data, reflecting weaker capital inflows despite the country’s long-term growth prospects.
Private investment has yet to fully offset the decline. Although gross fixed capital formation expanded 10.8% in the January-March quarter, economists say much of the increase was supported by government infrastructure spending rather than a broad-based pickup in corporate capital expenditure.
Business activity has also moderated. The HSBC Flash India Composite Purchasing Managers’ Index (PMI) eased to 54.3 in July, its lowest level in more than four years. While a reading above 50 indicates expansion, the decline points to slower growth across manufacturing and services.
Higher oil prices add pressure on inflation and the rupee
India remains highly exposed to energy price fluctuations because it imports more than 80% of its crude oil requirements. Brent crude’s rise toward $95 a barrel following tensions in the Middle East has increased import costs and added pressure on the Indian rupee.
Higher crude prices widen India’s trade deficit, raise inflationary pressures and increase input costs for businesses, limiting the scope for stronger private consumption. The International Monetary Fund (IMF) has identified elevated oil prices and weather-related risks to agricultural output as key challenges to India’s near-term economic outlook.
The Asian Development Bank (ADB) has also lowered its growth forecast for India, citing weaker global demand and higher energy costs, while economists warn that persistent oil price volatility could delay a broader recovery in private investment.
RBI remains confident despite external headwinds
Despite slowing growth forecasts, the RBI has maintained that domestic demand, manufacturing activity and the services sector continue to support economic expansion.
The central bank said the Indian economy has remained resilient despite global uncertainty, while the government expects to meet its FY2026-27 fiscal deficit target of 4.3% of GDP, helped by a recent moderation in the price of India’s crude oil basket.
Economists polled by Reuters expect growth to recover modestly to 6.8% in FY2027/28, suggesting India’s medium-term outlook remains positive. A sustained rebound, however, will depend on stronger private investment, improved foreign capital inflows and greater stability in global energy markets.
