The Reserve Bank of India (RBI) on Wednesday raised its GDP growth forecast for the April-June quarter by 40 basis points to 7%, saying that several indicators suggested the Indian economy performed better than expected in Q1. Barclays India Chief Economist Aastha Gudwani believes that growth in the first quarter of FY27 could be even higher than 7%. In an interview with Shubham Rana, he says that the RBI’s Monetary Policy Committee is unlikely to raise interest rates in 2026, and rates hikes may take place in early 2027. Edited excerpts:
Q. What were your main takeaways from the RBI Policy?
A. The things that really stood out to me were the MPC’s dedication to the 4% inflation target. Time and again, the RBI has clearly stated that it understands inflation is rising, but the composition of inflation and when it will peak also matter. The second point was on the stance. A change in stance will be delivered when there is some certainty regarding the next rate move, which is not there at the moment.
Q. Barclays sees a rate hike in February. Why do you think so, given that inflation would have already peaked by then?
A. The inflation reading will have less noise by then and our FY28 retail inflation forecast is about 4.7%. And with the repo rate at 5.25%, I think we should hike rates by about 50 basis points in total to offer a 1% real rate, given the year-ahead inflation forecast.
Q. Recent PMI data suggests a sharp slowdown in the manufacturing and services sectors. Do you think this is a point of concern?
A. If you look at the other high-frequency indicators that we track, 15 out of 20 performed better in June than in May. The indicators for which July data is available are also rather strong.
I think the April-June GDP number, which the RBI revised to 7% on Wednesday, could be higher than 7%.
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Q. India has received over $40 billion till July 31 from the various schemes announced in June. Do you have an estimate of how much the schemes can gather by the end of September?
A. We expect about $70 billion of total inflows in FY27 from FPI investments in Indian government bonds, ECBs, OFCB, and FCNR.
Q. Do you think the government will be able to meet the 4.3% fiscal target for FY27?
A. The target for this year is not the fiscal deficit-to-GDP ratio at 4.3%, but the debt-to-GDP ratio at 55.6%. The government can achieve the debt-to-GDP target, even with a modest fiscal slippage of 10-20 basis points due to a shortfall in excise duty revenue and additional fertiliser and fuel subsidy requirements.
At the same time, divestment proceeds will be in line with the target, if not more. Government will probably reduce some of its non-committed revenue expenditure.
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