Twin shocks from an energy crisis and deficient rainfall are likely to slow India’s economic growth and stoke inflation, potentially prompting the central bank to raise interest rates, foreign brokerage HSBC said on Monday.
India’s real GDP growth is seen easing to 6 per cent in the fiscal year ending March 2027 from an estimated 7.4 per cent in FY26, HSBC said, citing the combined impact of higher oil prices, El Nino-linked weather disruptions and some fiscal slippage.
“Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6 per cent in FY27, lower than our previous year’s forecast of 7.4 per cent,” HSBC said in a report. It warned that the emerging pressures would hit the formal sector, including rural households and small firms.
The downgrade contrasts with the central bank’s projection. The Reserve Bank of India last month estimated growth of 6.9 per cent for 2026-27.
Oil prices have surged as conflict in West Asia keeps crude trading above USD 100 a barrel, adding to inflation risks. HSBC said the twin shocks, along with deficient rainfall due to El Nino and higher temperatures, warrant closer scrutiny of the FY27 outlook, noting that heat stress would also weigh on activity.
HSBC’s model suggests the El Nino and temperature channel could add about 0.5 percentage point to inflation over a year, lifting headline inflation to 5.6 per cent in FY27. It cautioned that inflation could breach the central bank’s 6 per cent upper tolerance for at least two quarters.
Against this backdrop, the brokerage expects the RBI to deliver two rate hikes in the December and March quarters, though it does not anticipate action at the upcoming policy meeting in early June.
The report said its inflation forecasts assume petrol and diesel price increases of up to Rs 7 per litre to ease losses at oil marketing companies, estimated at around Rs 30,000 crore a year. If such hikes do not materialise, average inflation in FY27 could be lower at about 5.3 per cent, it added.
HSBC also argued that rising temperatures have become a better predictor of food inflation than rainfall, citing improvements in irrigation. “We find that the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Nino years is rising,” it said, adding that tracking surface temperatures may be sufficient to gauge the trajectory of food prices in most regions. |
