After a stronger-than-anticipated Q1 outturn, momentum has continued into September. Industrial activity, exports, sustained public investment and improving private capex intentions suggest a gradual broadening of the investment cycle. On consumption, while urban discretionary spending remains buoyant, mass-market demand and deteriorating rural sentiment expose vulnerabilities in household purchasing power. Festive demand could sustain spending through Q2–Q3, but its durability will face a sterner test beyond Q3. We retain our FY27 GDP growth forecast at 6.9%, with a resilient first half giving way to moderation in the second, as deficient rainfall weighs on farm incomes and renewed geopolitical and energy-related risks cloud the outlook. The inflation outlook, meanwhile, has become distinctly less benign, with price pressures beginning to broaden. The 13% monsoon deficiency along with its uneven distribution are constraining the agricultural supply outlook and an intensifying El Niño limit confidence in a compensating Rabi recovery. Reflecting the weaker rainfall outturn and our revised crude-price assumption of USD 85–90/bbl, we raise our FY27 average CPI inflation forecast by 20 bps to 5.3%, with inflation expected to average close to 6.0% in H2FY27

From a financial market’s perspective, the re-escalation of the Middle East conflict has made energy and freight costs the dominant driver of sentiment. Indian equities, bonds and the rupee sold off in unison in Sep-26. Globally, growth has held up but inflation is rising broadly, prompting the widest round of G20 rate hikes since the conflict began. With real rates well below pre-pandemic levels just as inflation turns up, we bring forward our first rate hike call to October from December and now expect 75 bps of cumulative hikes in H2 FY27, taking the repo rate to 6.00% by Mar-27. Sterilization of special FX inflows remains incomplete, with core liquidity at its highest since 2022, warranting further absorption through FX swaps and possibly CMBs. Amidst relatively heavier H2 central and state borrowing, a demanding FY28 fiscal arithmetic, and higher global term premia, we revise our 10Y g-sec yield forecast to 7.50% by Mar-27 (from 7.25%), accompanied by a flattening bias for the yield curve. Elevated global commodity prices, a firm dollar, and a widening inflation differential point to a weaker rupee, although deep undervaluation limits the risk of a disorderly selloff. We retain our USDINR forecast of 97 by Mar-27, with risks skewed towards further depreciation.