India’s economy likely to grow 7.3% in Q2 FY27: Finance Ministry

India’s economy is expected to grow by 7.3 per cent in the second quarter of FY27, supported by resilient domestic demand and investment, even as higher oil prices, tighter global financial conditions and trade uncertainties pose challenges to sustaining the growth momentum, the Ministry of Finance said in its Monthly Economic Review for September 2026.

The review said the economy entered the second quarter from a position of strength after recording 7.8 per cent growth in Q1 FY27, the highest first-quarter growth in the current series.

The ministry, however, cautioned that India cannot take its growth performance for granted amid rising geopolitical polarisation, disruptions in global supply chains and an increasingly challenging external environment.

“Our nowcasting measure, unveiled in the Economic Survey earlier this year, anticipates a real GDP growth rate of 7.3 per cent in the fiscal second quarter,” the review said.

High-frequency indicators suggest that economic activity has continued into the second quarter, although at a more measured pace. E-way bill generation and manufacturing activity have moderated, while services activity strengthened in August, supported by new business and employment.

The review said healthy growth in electricity and fuel consumption, sustained bank credit expansion and stronger production of capital and infrastructure goods point to continued investment momentum. Automobile sales in both rural and urban markets also indicated broad-based consumption demand.

The investment rate reached its highest level in the current series during the first quarter. Manufacturing grew by 9.2 per cent, while services expanded by 10 per cent, indicating broad-based economic expansion.

Private consumption grew by 7.1 per cent, while gross fixed capital formation increased by 11.9 per cent in Q1 FY27. Construction activity grew by 7.7 per cent, while real GVA rose 8.2 per cent.

The external sector also remained a source of support. Total merchandise and services exports rose 15.5 per cent year-on-year to USD 399.3 billion during April-August FY27.

At the current pace of nearly USD 400 billion in exports during the first five months of the financial year, the country’s overall export value for the full financial year could approach USD 1 trillion, the review said.

Merchandise exports increased by 26.1 per cent in August, while the services trade surplus offset 65 per cent of the merchandise trade deficit.

The country’s foreign exchange reserves stood at USD 765.9 billion as of September 18, providing a substantial buffer against external vulnerabilities. The review also said net foreign direct investment inflows could improve during the current financial year compared with the previous year.

However, the external environment has become more challenging. The review said global conditions had “turned unfavourable again”, with oil prices rising sharply in September and global bond yields moving higher.

While Indian bond yields have risen by less, the lower risk premium on Indian debt is putting pressure on the rupee, the review said.

The ministry also flagged intensified competition for global capital as developed economies seek investment for renewed manufacturing capacity and artificial intelligence infrastructure.

“India, as do other developing nations, faces a stiff challenge to attract capital flows,” the review said, noting that short-term pressure on Indian assets, including the currency, remains.

Trade relations with the United States also remain unsettled, according to the review. It cited the passage and Presidential assent to the Graham Bill, which it said empowers the US President to impose tariffs of up to 100 per cent on countries purchasing Russian crude oil.

The review said uncertainty surrounding trade relations with the US, tariff pressures and crude oil prices continued to weigh on investor sentiment towards India.

Inflation is another risk to the outlook. Retail inflation rose to 4.82 per cent in August, while elevated energy prices, weather-related disruptions, festive demand and higher input costs could create near-term price pressures.

Recent economic indicators showed continued activity, though with some moderation. Industrial production grew by 6.7 per cent in July, while the manufacturing PMI stood at 52.8 in August. Electricity consumption rose 12.7 per cent and bank credit remained strong.

The review said reservoir storage and largely stable groundwater conditions provide support to agriculture. However, the distribution of rainfall and potential El Niño-related risks to the upcoming rabi crop would need to be monitored.

Against this backdrop, the Finance Ministry stressed the need for consistent and timely policymaking, stronger governance and greater competition to sustain growth and attract investment.

“Only a competitive economy will become a successful, innovative, and manufacturing economy,” the review said, adding that improved governance and enhanced state capacity at all levels of government would be key to building a competitive Indian economy.

The ministry said investor interest in India was “not low but cautious” and warned that geopolitical tensions, volatile energy prices, tighter global financial conditions and supply-chain disruptions remained key risks to the growth outlook.

-ANI