Iran war and energy crisis neutral! Moody’s has raised India’s growth rate, forecasting it to be 7% in FY27

Moody’s Ratings has raised India’s economic growth forecast for FY2027 to 7% from 6.5%. The reasons behind this are macroeconomic strength, increased domestic consumption, improvement in investment activities and the ability of the economy to withstand shocks in energy supply due to the Iran war.

The rating agency said India has adjusted to energy prices better than expected. This has been helped by India’s ability to diversify its sources of supply of crude oil and natural gas and limit the immediate impact on consumers. State-owned oil companies and tax cuts have helped protect households and businesses from energy price shocks.

Moody’s says India will be able to sustain growth around 7% over the medium term due to robust consumption, improving investment and strong macroeconomic fundamentals. The revised estimate comes at a time when India’s economy grew by 7.8% year-on-year in the April-June quarter, much higher than market expectations. A boom in investment and strong manufacturing activity, along with strong consumer demand, have supported growth despite external economic pressures.

The pace of improvement in private investment may accelerate

According to Moody’s, several economic indicators indicate that India is heading for a new cycle of private capital spending. Strength in production and imports of capital goods, increase in industrial credit and increase in capacity utilization indicate improvement in investment demand. This could spur a broader reform in private sector spending. A sustained increase in private capital expenditure will strengthen the growth outlook as it will further support consumption-led expansion and industrial activity.

Inflation and monsoon are among the main risks.

However, the agency has also identified some risks that could affect India’s growth rate. These include rising price pressures on domestic consumption, lack of southwest monsoon (which may affect agricultural production and rural demand), and fiscal policy (which may slow the recovery in private investment).

India’s retail inflation figures for October are due on Thursday, which will give a fresh indication of the level of price pressures. Economists surveyed by Reuters expect consumer inflation to rise to 5.93 percent, near the upper end of the Reserve Bank of India’s (RBI) tolerance limit.

The RBI hiked interest rates for the first time in nearly four years in October. Markets expect a further increase in monetary tightening by 90 basis points over the next 12 months. This can increase borrowing costs, which can affect consumption and investment.