Morgan Stanley has warned that rising oil prices and prolonged geopolitical tensions could weaken India’s macroeconomic stability and slow gross domestic product growth to 6.7% in FY27, even as strong domestic demand and government led capital expenditure continue to support the economy.
In its “India Economics Mid Year Outlook” report, the brokerage said India’s economic resilience remains intact despite “transient drags” from global uncertainty, elevated commodity prices and supply chain disruptions.
“We expect growth to hinge on domestic demand amid external uncertainty,” Morgan Stanley said.
The brokerage expects India’s GDP growth to moderate to 6.7% in FY27 from an estimated 7.6% in FY26 before recovering to 7% in FY28.
“We expect growth to trough in QE Jun 26, reflecting the impact of the conflict, and to gradually normalise to pre conflict levels by Mar 27,” the report said.
Morgan Stanley said urban consumption, infrastructure and defence related public capital expenditure, along with resilient services exports, would help offset weakness arising from external shocks.
“Urban demand, government capex on infrastructure/defence, and services exports should provide offsets,” it said.
The report noted that April high frequency indicators continued to show resilience despite a weaker global backdrop. Manufacturing and services Purchasing Managers’ Index readings improved, goods and services tax collections touched record highs and bank credit growth remained strong.
Corporate earnings for the March 2026 quarter also exceeded expectations due to stable margins and healthy demand conditions, the brokerage said.
Inflation and external risks rising
Morgan Stanley warned that higher oil prices, imported inflation and currency weakness could increase pressure on inflation and India’s external balances in FY27.
“We expect headline CPI inflation to average ~4.7% YoY in F2027, driven by higher production costs, INR weakness, and spillovers into core inflation,” the report said.
The brokerage expects Brent crude oil prices to average $87.5 per barrel in FY27 under its base case scenario.
It added that elevated oil prices could widen India’s current account deficit to nearly 1.8% of GDP while slower capital inflows may increase pressure on the balance of payments and the rupee.
“Higher oil prices could widen the current account deficit to ~1.8% of GDP, while slower capital inflows may keep the BoP in deficit for a third consecutive year, increasing currency vulnerability,” Morgan Stanley said.
The brokerage also flagged risks from slowing global growth and geopolitical disruptions, particularly in the Middle East and the United States, which together account for a significant share of India’s exports.
Exports to the Middle East more than halved year on year in March 2026, while shipments to the US have remained on a declining trend since September 2025, according to the report.
RBI likely to stay on pause
Morgan Stanley said the Reserve Bank of India is expected to maintain a pause on interest rates through FY27 while relying on liquidity and foreign exchange measures to manage external pressures.
“We expect the RBI to remain on pause in F2027, balancing growth and inflation risks from the supply shock,” the report said.
The brokerage expects the central bank to use non rate measures, including tighter overseas investment norms and efforts to boost non resident Indian deposits and foreign exchange inflows, to stabilise currency markets.
Morgan Stanley, however, expects a shallow rate hiking cycle in FY28 with two 25 basis point increases likely in the first half of the fiscal year, taking the terminal policy rate to 5.75%.
Investment cycle remains intact
The report said public and private investment activity remains a key pillar supporting India’s medium term growth outlook.
Central government capital expenditure is projected to rise 11.5% year on year in FY27, with infrastructure spending expected to grow 14%.
Private investment commitments increased 51.5% year on year in FY26, led by sectors such as semiconductors, renewable energy, electronics, data centres and defence manufacturing.
Morgan Stanley said India’s investment to GDP ratio could rise to 37.5% by FY30 as the country adds nearly $800 billion in investments over the next five years.
“Private capex is gaining momentum but remains concentrated in sectors such as power, semiconductors, data centres, and electronics,” the report said.
The brokerage added that India’s services exports and expanding trade partnerships with countries including the United Kingdom, United Arab Emirates, Australia and the European Union could help cushion pressure on merchandise exports amid global uncertainty.
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