The Reserve Bank on Wednesday raised its GDP growth forecast for the current fiscal year by 40 basis points to 7.1 percent, while also warning that prolonged global geopolitical tensions could pose risks to the economic outlook. Announcing the October monetary policy, Governor Sanjay Malhotra said that despite global challenges, domestic economic activity has shown strength, pointing to real GDP growth of 7.8 percent in the first quarter (Q1) of 2026-27. Growth was boosted by strong private consumption and investment, while the contribution of net exports was also positive. He further said that global challenges such as prolonged geopolitical tensions, high international commodity prices, additional barriers to global trade and tightening of global financial conditions could affect the growth outlook.

Taking into account all these factors, real GDP growth is estimated at 7.1 per cent for 2026-27, 7.2 per cent in the second quarter, 6.9 per cent in the third quarter and 6.8 per cent in the fourth quarter, Malhotra said. He said the 40 basis point increase in growth estimates further highlights the strength of economic activity despite major challenges. The central bank also said GDP growth is estimated at 7.1 percent for Q1:2027-28 and risks remain balanced.

World agencies also expressed confidence

Meanwhile, the World Bank also raised India’s GDP growth estimate for the current fiscal year to 7.1 percent, up 0.5 percent from the April estimate. This has been supported by strong domestic demand and good exports, while global challenges also persist. Last month, the Asian Development Bank (ADB) and other global agencies like the OECD and S&P and Fitch raised India’s FY27 GDP growth forecast to around 7 percent. This was boosted by strong economic activity in the June quarter and strong domestic demand despite the West Asian conflict. The Paris-based Organization for Economic Cooperation and Development (OECD) has raised its GDP growth forecast for FY27 by 80 basis points to 7.1 percent.

7.8% GDP growth changed RBI’s view

Growth of 7.8 percent in the June quarter boosted policymakers’ confidence that domestic demand was better than expected. At its August policy meeting, the central bank had already said that economic activity remained strong, citing good consumption, the services sector, investment and government spending. But he also warned that uncertainty in global trade, conflict in West Asia and adverse weather conditions could affect growth.

Strong first quarter numbers have changed the tone of the conversation. Although some high-frequency indicators weakened slightly in July and August, growth momentum remains strong. This strength has also increased economists’ confidence that the economy can withstand some degree of fiscal tightening (interest rate hikes).

Yes Bank Chief Economist Indranil Pan said in a report on October 1 that growth has absorbed the shock of the West Asia war and there is now more confidence that the economy can withstand a modest increase in policy rates. So the RBI goes into its October policy meeting with stronger growth than in August — even as the inflation outlook has become more challenging.

Increases after every 44 months

How fast has the climate changed since August? The change marks the first rate hike since February 2023, when the repo rate was raised to 6.50 percent, and will signal a return to RBI tightening after a long hiatus. With the inflation outlook deteriorating, the possibility of a rate hike has become stronger.

Crude oil prices remain above $100 per barrel, erratic monsoons have raised concerns about food prices and recent hikes by the US Federal Reserve have narrowed the interest rate gap between the two economies. Due to all these pressures, it is becoming difficult for the RBI to ignore what was earlier considered a temporary supply shock.

This change may also be the start of a long-term tightening cycle rather than a one-time action. Goldman Sachs has upped its rate hike forecast and now expects 25-basis-point hikes in December 2026 and February 2027, while it previously expected the cycle to start in October.