The Indian economy is at an interesting juncture. A headwind like rising food inflation or a tailwind like FCNR(B) – What will impact the economy most? At a time when the geopolitical situation, especially in West Asia is still not resolved and trade deals with the US have still not been finalized, what’s the big call on India?
International brokerage firm, Nomura pointed out that “The sentiment has changed significantly over the past year, with more confidence on growth, fiscal and current account resilience (despite the Iran war), reduced concerns on trade friction with the US (despite no trade deal), but the focus is now shifting to India’s adaptability to AI trends, foreign investment uncertainties and job creation,” Nomura noted.
Key challenges for India now
Nomura expects FY27 GDP growth at 6.6%, while acknowledging the possibility of an upside surprise after strong Q1 performance. It expects inflation to remain around 5%, fiscal slippage at around 0.2% of GDP and no RBI rate hikes through this year and next year.
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As per Nomura, the country has remained resilient despite disruptions linked to the Iran war but now weak monsoon pose a risk to growth in the coming quarters.
Here is the detailed picture why Nomura says that this year the focus has shifted from fiscal concern and US trade deals to food inflation due to El Nino and AI trends.
The risk of food inflation climbing to 8%
Food Inflation is expected to reach 8% in August-September due to delayed monsoon which is likely to hurt yields owing to a shorter growing period.
Half empty water reservoirs in South India which will create a risk for rabi (winter) crops as well.
The crops most at risk of lower output include coarse grains, pulses (tur, moong) and oilseeds (soyabean, groundnut).
Despite this pressure, Nomura said core inflation is expected to remain muted, suggesting limited pass-through into broader prices.
“Overall, CPI inflation could average 5% or slightly lower in FY27,” Nomura noted.
Monsoon recovery in July may ease growth risks
The El Nino is not proving to be as severe for India’s monsoon as initially feared. In fact the pace of rainfall has recovered significantly in recent weeks, reducing downside risks to agriculture and economic growth.
Though the southwest monsoon had a weak start, with rainfall 38.6% below normal in June, conditions improved sharply in July, when rainfall was 1% above normal.
Despite the recovery, rainfall remains uneven across regions, while lower rice acreage and weak reservoir levels continue to pose risks to food inflation. The improvement in Central India is particularly encouraging as the region accounts for a significant share of India’s agricultural output.
Motilal Oswal expects India’s real GDP growth to remain in the 6.8-7% range in FY27. The brokerage has retained its FY27 CPI inflation forecast at 5.1%.
Rural consumption expected to hold up despite monsoon risks
Rural consumption demand is not expected to adversely affect the economy. Nomura believes lower crop output could be partly offset by stronger livestock and fisheries activity.
“Deficient monsoons create downside risks for subsequent quarters, but agricultural GVA growth is likely to remain positive (~1.5% y-o-y in FY27 versus its trend of 3.5-4.0%), due to lower crop output being offset by higher livestock and fisheries output. Agricultural income now accounts for less than 30% of rural income, so a lower crop output may not adversely affect rural consumption demand,” Nomura noted.
FCNR(B) inflows offer relief to BOP
India’s balance of payments remains a key area of debate. The FCNR(B) scheme has already attracted close to $50 billion and is expected to attract combined inflows through FCNR(B) and external commercial borrowing schemes to reach $80-90 billion. But will it help India’s balance of payments?
Nomura noted that economists and market participants remain divided over whether India’s BOP challenge is cyclical or structural.
The cyclical camp points to uncertainty around US policies, US-India yield differentials, AI-driven portfolio outflows and repatriation flows after the stock market peak.
The structural camp, meanwhile, is concerned about the impact of AI on India’s services exports and the country’s stagnant share of global manufacturing exports.
Most participants consider the rupee undervalued based on the real effective exchange rate. However, Nomura expects gradual depreciation over the medium term, beyond the next six to nine months.
Fiscal risks remain contained as of now
Higher fertiliser subsidies and fuel excise duty cuts remain key areas of concern. Fertiliser subsidies could rise to around Rs 2.8 trillion, compared with the budget estimate of Rs 1.7 trillion.
The government, however, has fiscal buffers, including the Rs 1 trillion Economic Stabilisation Fund, which could help contain the slippage while protecting government capital expenditure.
The government aims to reduce central government debt to around 50% of GDP by FY31 and gradually lower the fiscal deficit target by around 0.1 percentage point of GDP every year.
Nomura is cautious and expects slippage of around 0.2% of GDP.
India recalibrates trade strategy
Last year Trump’s tariffs and trade deal with the US was one major concern of India. However, now India appears less rushed to conclude a trade deal with the US. Instead, the government is taking a more calibrated approach to protect domestic interests, particularly agriculture and labour-intensive industries.
India is also seeking to diversify its export markets by pursuing trade agreements with around 38 countries, including the UK, EU and New Zealand.
“India’s China strategy is also gradually evolving. We note a prudent engagement with China, owing to its role in exporting intermediate goods inputs that are critical for India’s Global Value Chain (GVC) integration,” Nomura noted.
AI may disrupt low-end IT jobs
AI has emerged as one of the biggest concerns for India’s services sector and workforce as enterprise AI adoption remains low.
Nomura noted that once companies begin deploying agentic AI, demand could increase for workers with localised knowledge, potentially supporting India’s services exports.
“India may also benefit from AI application in manufacturing, agriculture, healthcare, education and governance,” Nomura noted.
The transition could hurt low-end jobs. Nomura said low-end coding jobs are likely to be eliminated, while higher-end roles related to AI deployment could expand.
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Nomura said India’s ability to reskill workers will be critical. Universities, industry bodies and the skill development ministry will need to work together to prepare the workforce for the transition.
Possibility of rate hike in FY27?
Where do all of these factors leave the rate hike trajectory? India is walking the tight rope balancing geopolitical and weather-related headwinds and a resilient growth trajectory supported by RBI’s liquidity boosting measures.
Nomura expects the RBI to keep the policy rate unchanged for the rest of this year and next year, citing RBI’s focus on core inflation rather than headline inflation. Liquidity is also expected to remain manageable, according to Nomura.
Motilal Oswal also expects RBI MPC to maintain the repo rate at 5.25% through calendar year 2027 citing improving growth-inflation trade-off.
However, the brokerage expects RBI to respond if food- and fuel-led price pressures become broad-based and start spilling over into core inflation.
TOPICSArtificial IntelligenceECONOMYEl NinoGDPIndian Economymotilal oswalNomuraRBIReserve Bank of India + 0 MoreThis article was first uploaded on August fourteen, twenty twenty-six, at thirty-four minutes past one in the afternoon. © IE Online Media Services (P) Ltd