Morgan Stanley has warned that rising oil costs and extended geopolitical tensions might weaken India’s macroeconomic stability and sluggish gross home product growth to 6.7% in FY27, at the same time as sturdy home demand and authorities led capital expenditure proceed to help the financial system.
In its “India Economics Mid Yr Outlook” report, the brokerage stated India’s financial resilience stays intact regardless of “transient drags” from world uncertainty, elevated commodity costs and provide chain disruptions.
“We count on growth to hinge on home demand amid exterior uncertainty,” Morgan Stanley stated.
The brokerage expects India’s GDP growth to average to 6.7% in FY27 from an estimated 7.6% in FY26 earlier than recovering to 7% in FY28.
“We count on growth to trough in QE Jun 26, reflecting the affect of the battle, and to progressively normalise to pre battle ranges by Mar 27,” the report stated.
Morgan Stanley stated city consumption, infrastructure and defence associated public capital expenditure, together with resilient providers exports, would assist offset weak spot arising from exterior shocks.
“City demand, authorities capex on infrastructure/defence, and providers exports ought to present offsets,” it stated.
The report famous that April excessive frequency indicators continued to present resilience regardless of a weaker world backdrop. Manufacturing and providers Buying Managers’ Index readings improved, items and providers tax collections touched file highs and financial institution credit score growth remained sturdy.
Company earnings for the March 2026 quarter additionally exceeded expectations due to secure margins and wholesome demand situations, the brokerage stated.
Inflation and exterior dangers rising
Morgan Stanley warned that increased oil costs, imported inflation and forex weak spot might improve strain on inflation and India’s exterior balances in FY27.
“We count on headline CPI inflation to common ~4.7% YoY in F2027, pushed by increased manufacturing prices, INR weak spot, and spillovers into core inflation,” the report stated.
The brokerage expects Brent crude oil costs to common $87.5 per barrel in FY27 beneath its base case state of affairs.
It added that elevated oil costs might widen India’s present account deficit to practically 1.8% of GDP whereas slower capital inflows could improve strain on the stability of funds and the rupee.
“Larger oil costs might widen the present account deficit to ~1.8% of GDP, whereas slower capital inflows could hold the BoP in deficit for a 3rd consecutive yr, rising forex vulnerability,” Morgan Stanley stated.
The brokerage additionally flagged dangers from slowing world growth and geopolitical disruptions, notably within the Center East and america, which collectively account for a major share of India’s exports.
Exports to the Center East greater than halved yr on yr in March 2026, whereas shipments to the US have remained on a declining development since September 2025, in accordance to the report.
RBI seemingly to keep on pause
Morgan Stanley stated the Reserve Financial institution of India is predicted to keep a pause on rates of interest via FY27 whereas counting on liquidity and overseas trade measures to handle exterior pressures.
“We count on the RBI to stay on pause in F2027, balancing growth and inflation dangers from the availability shock,” the report stated.
The brokerage expects the central financial institution to use non price measures, together with tighter abroad funding norms and efforts to enhance non resident Indian deposits and overseas trade inflows, to stabilise forex markets.
Morgan Stanley, nonetheless, expects a shallow price climbing cycle in FY28 with two 25 foundation level will increase seemingly within the first half of the fiscal yr, taking the terminal coverage price to 5.75%.
Funding cycle stays intact
The report stated private and non-private funding exercise stays a key pillar supporting India’s medium time period growth outlook.
Central authorities capital expenditure is projected to rise 11.5% yr on yr in FY27, with infrastructure spending anticipated to develop 14%.
Personal funding commitments elevated 51.5% yr on yr in FY26, led by sectors akin to semiconductors, renewable vitality, electronics, information centres and defence manufacturing.
Morgan Stanley stated India’s funding to GDP ratio might rise to 37.5% by FY30 because the nation provides practically $800 billion in investments over the subsequent 5 years.
“Personal capex is gaining momentum however stays concentrated in sectors akin to energy, semiconductors, information centres, and electronics,” the report stated.
The brokerage added that India’s providers exports and increasing commerce partnerships with international locations together with the UK, United Arab Emirates, Australia and the European Union might assist cushion strain on merchandise exports amid world uncertainty.
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