Monsoon woes, crude concerns, inflation worries may cloud India’s second half growth momentum

“We are concerned that second half growth is going to be materially lower than first half growth because of three reasons. One is that all the pain related to the monsoon actually lies ahead as far as the numbers are concerned. Second, the GST rationalisation base is now going to make high frequency growth look much lower than what we've been used to. And third, at some point, the high crude oil and other commodity prices have to start emerging as pain,” Nayar told Business Today.

Any meaningful increase in retail fuel prices would put further pressure on household budgets, she said.

On the farming front, Nayar is not too worried about the kharif crop, given that reservoir levels were healthy at the start of the season and above-normal rainfall in July helped many regions. The bigger impact, she says, will be on the rabi crop, as reservoir levels are now much lower and groundwater levels in some states have also fallen.

The Reserve Bank of India’s monetary policy committee raised the repo rate by 25 basis points (0.25 percentage points) to 5.50% on October 7 against a backdrop of rising inflation and elevated crude oil prices. Many analysts expect the MPC to raise the benchmark rate at which the RBI lends to commercial banks by at least another 50–75 basis points in the coming months.

Taking a more cautious view, however, Nayar expects the central bank to raise the repo rate by another 25 basis points at the next MPC meeting in December. Any additional hikes will depend on how the macroeconomic situation and crude oil prices evolve.

“If crude were to correct substantially, which can happen, then the expectation on future rate hikes may suddenly temper,” said Nayar.

More importantly, Nayar stressed that the RBI may not want to raise rates too quickly or too much, given India’s resilient economic growth so far.

“A rate hike is not sufficient to bring in the foreign money, but doing extra rate hikes if the domestic situation doesn't warrant, will choke off your growth, which will also become counterintuitive for FII equity money,” Nayar pointed out.

ICRA has forecast average CPI (consumer price index) inflation of 5.2% for the current financial year ending March 2027, but Nayar said there are upside risks. Inflation in several sub-segments could breach the RBI’s 6% comfort level in the third quarter, she said.

The key inflation risk is crude oil prices and the extent to which higher costs are passed on to consumers through retail fuel prices if crude remains elevated.

This week, the US Federal Reserve left interest rates unchanged while warning that inflation remained elevated.

Crude oil prices above $110 a barrel are driving up India’s import bill and putting additional pressure on the rupee. The currency has depreciated sharply against the US dollar this year amid heavy equity selling by foreign portfolio investors (FPIs). In 2026, up to October 29, FPIs had pulled more than Rs 2.94 lakh crore out of the equity market.

Besides geopolitical uncertainties, a spike in bond yields in major markets has contributed to the foreign investor sell-off. The US 10-year Treasury yield is still hovering around 4.98%, while the 30-year Treasury yield is around 5.3%.

The narrowing interest rate differential between India and the US has been a concern. However, Nayar pointed out that, given the expected inflation differential between the two countries, an interest rate spread of 200–250 basis points should be acceptable.

The RBI has taken several steps this year to shore up the rupee, which hit a record low of 96.96 against the US dollar. These measures included a special concessional swap window for foreign currency non-resident (bank), or FCNR(B), deposits, which netted more than $132 billion. The RBI also opened a special window to meet the entire daily foreign exchange requirements of the three state-owned oil marketing companies.

These measures have helped stem the rupee’s fall to some extent. The currency was trading around 95.19 against the US dollar on Friday, October 30. However, crude oil prices are beyond the RBI’s control, and their movements will continue to affect the currency, warranting a close watch.