Indian Economy: When risks become the baseline

Resilience has been the defining theme of the global economy since the tariff-related turbulence began in 2025 and, more recently, the crisis began in West Asia.

Neither has been fully resolved. Yet the global economy, including India, continues to outperform expectations. S&P Global raised its global gross domestic product (GDP) growth forecast 10 basis points (bps) to 3.2% for 2026; it expects a similar pace of expansion in 2027. India is projected to grow 7% this fiscal, compared with 7.8% last fiscal. 

Several factors explain this resilience. One is the significant boost to the United States (US) economy from artificial intelligence (AI)-related investment, with spillover benefits for economies supplying inputs for AI infrastructure. Another is the relatively modest increase in global crude prices despite disruptions to oil infrastructure and the Strait of Hormuz problem. 

Inventory drawdowns by countries such as China helped moderate demand and contain the rise in oil prices. This has provided some relief to India, which imports more than 85% of its crude oil requirements. While crude import prices have risen, export prices have increased faster, partly because refining infrastructure has been damaged. Hence, India's petroleum exports grew 37% in the first half, helped by favorable prices. This marks a turnaround from the average annual decline of 17% in petroleum exports over the previous three fiscals.

That advantage is being tested. Crude prices have moved higher again as the decline in supply has outpaced the decline in demand. But trade has proved resilient as countries, including India, have rerouted trade and diversified export markets, maintaining robust activity.

The domestic picture, however, presents a different set of risks. The monsoon season ended with cumulative rainfall 13% below the long-period average (LPA), along with significant spatial and temporal distortions in its distribution, raising concerns about agricultural output and food prices. We have closely tracked this year's monsoon through our proprietary Deficient Rainfall Impact Parameter (DRIP) and Rainfall Distortion Index (RDI), along with other food economy indicators. Against this backdrop, this month's theme examines the implications for both kharif and rabi output and what these could mean for food inflation.

The global food supply situation is also becoming concerning. A recent S&P Global Institute article highlights rising food security risks. Our Quickonomics article in October observed a rare, synchronized rise in global food prices could complicate India's food-price management. Accordingly, we have revised our retail inflation forecast for this fiscal to 5.3% from 5.1%. We expect the 10-year government security yield to end the fiscal at 7.2%.

With inflationary pressures broad-based, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recalibrated its stance towards tightening to safeguard price stability. After the 25bps repo rate hike in October, we expect a similar increase in December.