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EXECUTIVE SUMMARY

No end in sight and economies dig in for the long fight

With major conflicts turning into Wars of attrition, there is no timeline for normalisation of supply chains. Warning bells are ringing about the drawdown of global energy inventory and inadequate supply, and oil prices are firmly around USD 100/bbl. Commodity price uncertainty is straining fiscal purses. Only the AI/data centre boom is keeping advanced economies afloat, and here too concerns about over-valuation of AI stocks and tangibility of AI impact have come to the fore. Global growth is uncannily bright, but there is a looming fear that this could be final flash of a dying fire.

Central Banks firmly in rate hike mode as yields head towards a heavenly abode

Inflation is posing a stiff challenge which most not projecting a return to normalcy for years ahead. The fact is finally being met head-on with Central Banks deciding to exit the wait-andwatch mode. The US Fed, ECB, and BoJ all raised rates, and more seem to be in store. In an environment where advanced economy yields are heading north with US benchmark yields sitting near multi-decade high, and coupled with equity market outperformance, are pushing capital away from EMs to AEs, there is additional pressure on EMs to move up their policy bellwethers. Balancing precocious growth with currency and capital flow concerns even as fiscal buffers run low is posing questions for governments worldwide.

RBI begins the policy shift skyward, length and breadth of cycle is the new byword

The MPC raised the repo rate by 25bps in line with expectations. The change in stance to “Calibrated Tightening” from “Neutral” acted as a spike to this hike, and possibly indicates that the RBI wants to signal sternness on inflation. 75-100 bps increase in the repo is likely in this cycle, though the exact waveform of the policy signal is a matter of debate. While gradual rises remain the base case, a jumbo hike in Dec’26 seeing inflation prints for Sep’26 & Oct’26 remains in the realm of possibility. We expect the policy tide to turn some time in Q1FY28, based on the expected evolution in the growth-inflation dynamic.

A 9-month fix for the growth-inflation mix

Consumer inflation is expected to peak in Q3FY27. Base effects will start pulling back WPI from Mar’27 onwards, eventually spilling over to the CPI. In any case, CPI prints beyond Q1FY28 are likely to trend below 5% y/y. At the same time, the strong growth momentum seen in H1FY27 will have positive impact on H2, though PFCE and agriculture GVA could gradually ease. A robust base will start having a telling impact next fiscal. Thus, mid-CY27 is expected to be a turning point for the growth-inflation dynamic. By then, forward estimates of CPI and perhaps growth, are expected to be drooping downwards

With no way for the yields but up, banks and bonds to see a shake-up

As most drivers of yields pushed them north, a slimmer gross borrowing programme indicated by the Union in H2FY27 could do little to calm them. Benchmark 10Y G-sec yield is up ~70 bps in CY26, raging ahead of policy changes. Conditions in bond market point towards higher yields until the conflict eases and base effects subdue inflation some time in FY28. In such an environment, bank credit has gained from bonds and is in the high double-digits. The rate hike is expected to improve the margins of banks in the near term, while gradually slowing non-food bank credit growth as the fiscal ends. In short, FY27 seems to be a year for banks, and bonds may be expected to make a comeback in FY28.

FY27 GROWTH ON A STRONG FOOTING

* Real GDP growth was very strong in Q1FY27, chiming in at 7.8% y/y as against 7.1% forecast by the market. This was despite a 10bps upward revision in Q1FY26 GDP elevating the base. Nominal GVA was lower than expected due to methodological changes in deflator computation

* Manufacturing recorded a superb growth of 9.2% y/y in real terms. GFCF printed 11.9% y/y rise in Q1FY27. This is the highest ever figure recorded on the new series

SENTIMENTS ARE STRONG YET EASING

* The real economy roared as Q2FY27 ended. Manufacturing PMI surged once again after a brief lull, with automobile retails recording their best ever September. Industrial production has remained robust in the past 3 months. Industry credit growth was in double digits. All these indicate that GVA in Q2FY27 will again record a superb number for manufacturing

* Intra- and inter- country trade is booming. Port cargo volumes are surging, and this enthusiasm is corroborated by GST import-linked revenue (up 26% y/y in Sep’26) as well as brilliant goods exports. Railway freight volume is also growing at a fair pace, with healthy diesel consumption triangulating domestic demand-based enthusiasm

* Electricity supply has remained strong for much of FY27 due to torrid summer and below normal rainfall. The winter is expected to be warmer than usual, which could restrict consumption in Northern region. However, consumption for FY27 will grow stronger on-year than in FY26

* Consumption based indicators are rosy for now but Oct’26 could be a turning point once base effects eat away gains caused by GST rate rationalisation. UPI transaction pace edged down ahead of the proposed MDR. While hopes are up for the festive season, rising repo rate and damp rural sentiment amidst depressed kharif sowing could curb PFCE in H2FY27

WILL TAX REVENUES MAINTAIN MUSCLE IN A TOUGH ENVIRONMENT?

* Net direct tax collections rose 13.0% y/y to Rs. 12.1 trn in YTDFY27 as of 17 Sep’26. Gross collections during the same period were up 15.2% to Rs. 14.3 trn, with a surge in refunds. Net corporate tax collections rose to Rs. 5.6 trn (up 19.6%) while net non-corporate tax kitty swelled to Rs. 6.2 trn (up 6.0%). There was a solid increase in STT as well

* Indirect tax collections are weak. Come mid Oct’26, unfavourable base from the rate rationalisation exercise done last fiscal shall wear off and reflect a better picture. After lagging for some months, transfer to States/UTs has now picked up. There is a sharp rise in non-debt capital receipts due to successful monetisation

* Expenditure remains in check with ballooning capex while revex is controlled. Upside risks to revex exist from food and fertiliser subsidy. Fiscal deficit has grown by a considerable extent on year in 5MFY27 and achievability of the target for FY27 is a monitorable

STATE CAPEX SLUGGISH DESPITE HEALTHY TRANSFERS

* 23 States, in aggregate spent Rs. 2.4 trn (up 10.2% y/y) on capex during 5MFY27. This is merely 21.2% of the Budget. States which made fine progress on capex include Kerala, HP, and Assam. At the bottom of the pile were WB and UP.

* Transfer to States/UT from the Union was up 11.4% y/y in 5MFY27 at Rs. 5.9 trn. SGST was at Rs. 453 bn in Sep’26

* We expect gross market borrowing of States to rise moderately in FY27, up by ~4.5% y/y on a high base created by FY26

INFLATION SCORCHES AHEAD IN AUG’26

* CPI clocked 4.82% y/y, slightly above estimate and above last month’s figure. Rural inflation vastly outpaced urban price rise as food prices were supercharged, with CFPI at 5.95%. Prices were effervescent for personal care products and restaurants & accommodation services

* WPI printed a 9.92% y/y increase, accelerating from 9.78% in Jul’26, and above estimates. Price advance was led by fuel and power, which blazed ahead by 22.9%. Manufactured products got dearer due to chemicals, textiles, and electrical equipment. With this, WPI in 5MFY27 is up 9.57% y/y

EXTERNAL SECTOR STABILISED AS INR TRENDS SIDEWAYS

* Foreign investors fled from Indian shores as yields worldwide saw sharp rise and local equity markets continued to underperform. Total equity outflows in H1FY27 are now at USD 13.6 bn, while debt inflows are at USD 4.6 bn

* ECBs mobilised during the special scheme period of the RBI stood at USD 5.3 bn (8 Jun’26 to 31 Aug’26). Total ECB registrations in 4MFY27 totalled USD 22.3 bn, with much of the amount going towards on-lending, refinancing, or general corporate purpose

SOARING POWER DEMAND LIQUIDATES COAL STOCKS

* Total electrical energy supply in H1FY27 has reached 981.2 BU and is up 9.7% y/y. A torrid summer and scanty rainfall (12.6% below LPA) pushed up supply in Southern region by 21.5%, with Western and Northern regions also seeing exacerbated growth. Post-monsoon weather has also been warm, and the winter is expected to be weak

* High power demand has pushed up demand for thermal power and coal stock plummeted to 6 days by the end of Sep’26. This meant that supply on IEX slipped and prices scorched to the highest level since Apr’22

FASTAG COLLECTIONS RETURNING TO NORMAL AS BASE EFFECTS WEAR OFF

* Fastag collection growth had become depressed with the base changing owing to introduction of annual pass. It has recovered in Sep’26

* With WPI trajectory being strong in YTDFY27 and economic expansion holding up, the increase in toll collections in FY28 may be stronger

* MoRTH Minister Mr. Gadkari said that toll plazas will become barrier free using ANPR system by Mar’27. This will add Rs. 200-250 bn in revenue

* Capex spend has been flattish in 5MFY27. However, execution has improved with 72% of NH identified for award in FY26 already tendered out

CREDIT-DEPOSIT MATHS NORMALISING ON FCNR(B) BONUS

* Credit growth remains strong with broad-based enthusiasm. Large industry credit, which has expanded by 14.9% y/y as of Aug’26-end is the standout story. Sectors to show exceptional traction include gems & jewellery, vehicles, and engineering. We expect credit growth in the high double digits for much of FY27

* Within three months, the shortfall in deposits has tanked from Rs. 12 to Rs. 2 trn, helped by an estimated ~USD 115 bn in net FCNR(B) deposits. PVB disproportionately gained from this windfall, enabling them to drop their WADTDR (fresh) by 40bps between Jun’26 and Aug’26.

* Banks have minimal headroom on selling investments to meet credit needs with their investment in G-secs at a decadal low. The surge in deposits could motivate an uptick in investments here to keep their RWA in check as their portfolio becomes riskier and SLR investments offer juicy rates.

* We estimate a gross capital requirement of over Rs. 1.5 trn between Sep’26 to Mar’28. A lion’s share of the gross requirement for capital is expected to come from Basel III AT-1 bonds

IRDAI DROPS A COMMISSION BOMB ON INSURERS

* First year premium booked showed a spurt of 21.3% y/y to Rs. 487.8 bn. Momentum was exemplified in individual single and group single categories, while group non-single category was a laggard

* Non-life insurance gross direct premium clocked a rise of 8.9% y/y in H1FY27. At Rs 329.5 bn for Sep’26, industry premium increased by a mellower 5.9%

* IRDAI released a Consultation Paper during the month. It proposed reintroduction of product- and channel- specific commission limits instead of a uniform structure. Further, management expense limit is set to be lowered

INVESTORS WITHDRAW FROM MUTUAL FUNDS AS RETURNS LAG

* Net inflows were at Rs. 413.5 bn, down 21% y/y during Aug’26. Equity funds saw an exodus of investors owing to middling returns seen in the past few months, with debt funds seeing only minor traction

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