Moody's raises India's FY27 economic growth forecast to 7% citing resilience, but warns of inflation risks

New Delhi: Moody's Ratings Friday raised India's FY27 economic growth forecast to 7% from 6% previously, citing the economy's resilience to the ongoing conflict in West Asia.

It, however, cautioned that higher energy prices and erratic weather conditions due to El-Nino could pose inflation risks, crimping consumption and economic activity. India's gross domestic product (GDP) grew 7.8% in FY26. "Although we continue to expect India to grow faster than all other G-20 economies, as well as similarly rated emerging market sovereigns, risks remain," said Moody's Ratings. The agency said elevated energy prices, in the absence of a lasting resolution to the West Asia conflict, could push India's annual average inflation above its FY27 projection of 4.8%, compared with 2.4% in FY26.

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Crude oil prices have risen sharply since the start of the conflict on February 28, climbing above $100 per barrel from around $73 before the war.

"While the increased diversification of India's crude import sources, sizeable foreign exchange reserves and strong domestic demand provide important buffers, higher energy and fertiliser import costs, softer external demand and weaker remittance inflows from the Middle East could widen the current account deficit and weigh on growth momentum more broadly," said Moody's Ratings.

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India's GDP growth rose to 8.2% year-on-year in the first six months of 2026, compared with 7.3% in calendar 2025, backed by robust private consumption, continued gross fixed capital formation and services sector strength, said the rating agency in its periodic review of India's sovereign ratings.

Fiscal outlook

On fiscal policy, Moody's said the government's response to the West Asia shock had so far been muted, reflecting its commitment to reducing India's fiscal deficit to 4.3% of GDP in FY27 from 4.4% last fiscal. However, the agency noted that higher global energy prices could increase subsidy outlays and create pressure for additional support measures. Rising defence expenditure and continued infrastructure investment are also expected to constrain the pace of fiscal consolidation.

The government has estimated the debt-to-GDP ratio for FY27 at 55.6% of GDP, lower than 56.1% of GDP for FY26. It aims to reduce the ratio to 50% by March 2031. The agency expects debt reduction to remain gradual and debt affordability to stay weaker than that of similarly rated peers, reflecting India's high debt burden and elevated interest cost structure. "We continue to expect the gradual improvement in fiscal metrics to continue over the medium term, supported by strong nominal GDP growth and continued efforts to improve tax administration and revenue collection," it said.