The double blow of energy crisis and deficient rainfall is set to have real GDP growth fall to 6% in Fiscal 2027 from 7.4% in financial year 2026, a HSBC report said on Monday.
The blows will also spur inflation, and may cause the Reserve Bank of India to increase key lending rates twice in the current fiscal, the foreign company said in a report.
"Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6% in Fiscal 2027, lower than our previous year's forecast of 7.4%," the report said.
HSBC expressed caution regarding the developing crises and warned of a major hit to the formal sector, including rural households and small firms.
The RBI expects GDP growth to be at 6.9% for 2026-27, according to an estimate released in the prior month.
The escalating crisis in the Middle East has led to an acute increase in oil prices with crude continuing to trade above $100 per barrel.
HSBC economists argued that the twin crises and deficient rainfall due to El Nino warrants a closer attention on the Fiscal 2027 outlook, and added that higher temperatures will also dent activity.
"Our model suggests the El Nino/temperature channel can add 0.5% point to inflation over a year," it said, pegging the headline inflation to come at 5.6% in fiscal 2027.
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It, however, said that there will be at least two quarters where the headline inflation number is likely to shoot beyond the 6 per cent mark, which is the upper tolerance of the central bank.
The RBI is likely to deliver rate hikes in the December and March quarters as it sees the possibility of an increase in the inflation, it said, adding that there will not be any action at the upcoming policy in early June.
The brokerage said it has accounted for up to Rs 7 hike per litre on petrol and diesel prices to address the pain of oil marketers, who are reportedly suffering losses of up to Rs 30,000 crore per year. If the hikes do not happen, the average inflation for financial year 2027 will come at 5.3%, it said.
It argued that temperatures have become far better than rainfall in explaining and forecasting food inflation on factors such as 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 Niño years is rising," it noted.
The brokerage said that tracking surface temperature is enough to get a good sense of where food inflation is headed and added that one may not even want to track rains in most parts.
Citing the past instances, it explained that an El Nino year is associated with low rains, high temperatures, higher food inflation, and lower growth.
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(With PTI Inputs)
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