New Delhi [India], September 28 (ANI): India's GDP growth in the second quarter of FY2026-27 came in significantly above the Reserve Bank of India's (RBI) 7 per cent forecast, prompting expectations of a gradual rate-hiking cycle, according to a HSBC Global Investment Research report.

The report expects the RBI to raise the repo rate by 25 basis points twice in FY27, taking it to 5.75 per cent, as economic growth remains strong and inflationary pressures persist.

"Q2 FY26 GDP growth has come in much higher than the RBI's 7 per cent forecast. Furthermore, the RBI expects inflation to average more than 5 per cent over the next three quarters. This combination, we believe, opens the door for gentle rate hikes," the report said.

It also expects the RBI to absorb Rs 5-6 trillion of excess liquidity created by FCNR(B) deposits through durable measures such as open market operation (OMO) sales.

According to the report, inflation is expected to remain close to the RBI's 4 per cent target in the first half of FY27 before rising in the second half. Headline inflation is projected to average above 5 per cent over the next nine months.

"Brent oil prices have rebounded after briefly falling in June. El Nino conditions are likely to strengthen in the December quarter, potentially pushing food inflation higher," the report said.

It added that higher input costs could be passed on to consumers by companies, which may push core inflation towards 5 per cent by the end of FY27.

India's GDP growth for the quarter ended June stood at 7.8 per cent. The report said strong consumer demand and front-loading of manufacturing activity helped maintain economic momentum.

Government measures also supported growth, including GST and excise duty cuts, higher subsidies and a 40 per cent year-on-year increase in public capital expenditure.

However, the report expects economic growth to moderate in the coming quarters due to a high base, some slowdown in public capital expenditure, weak sowing and deficient rainfall, and the fading impact of GST rate cuts.

The report has projected India's growth at 7.2 per cent for FY27, saying growth is likely to soften gradually rather than slow sharply due to continued strength in economic activity.

Meanwhile, India's current account deficit is expected to widen to 1.3 per cent of GDP in FY27 from 0.6 per cent in FY26. The increase is expected to be driven mainly by higher oil prices and imports of electronics and other core goods.

The report also estimated that the central government's fiscal deficit could be 0.5 per cent of GDP higher than the budget estimate as spending rises due to measures to address the energy price shock. (ANI)