ADB upgrades India, but El Nino spoils party

AI Summary

The Asian Development Bank upgraded India's 2026 economic growth forecast to 7%, highlighting strong domestic consumption, investment, and government spending. However, an intensifying El Nino event and elevated energy prices threaten to cause a supply shock, risking inflationary pressures and weaker agricultural output in South Asia.

India’s economy is proving harder to knock off course, with the Asian Development Bank raising its 2026 growth forecast to 7% as resilient consumers, investment and government spending cushion the country from a volatile global backdrop.But the same outlook carries a warning: a strengthening El Nino, coupled with elevated energy prices, could turn into a fresh inflation shock for an economy where food prices have an outsized influence on household budgets.That could force the Reserve Bank of India to keep monetary policy tighter even as growth remains strong.Also Read: S&P Global Ratings raises India FY27 growth aim to 7% from 6.6%, estimates 25 bps RBI rate hikeThe upgrade, ADB said, reflects a broad-based domestic recovery. Private consumption has stayed firm, gross fixed capital formation is holding up and public infrastructure spending is accelerating. Services activity and a revival in private capital expenditure are adding to the momentum, helping India remain the fastest-growing major economy in the region.For now, that domestic strength is providing a buffer against weaker global demand and geopolitical disruptions. But weather has emerged as a more immediate threat to the growth-inflation balance, with a poor monsoon potentially hitting farm output, rural incomes and food prices at the same time.“A very strong El Nino event, combined with elevated energy prices, poses a dual supply shock to developing Asia—reducing agricultural yields, constraining hydropower output, and elevating price pressures across South Asia,” the ADB said in its Asian Development Outlook.The weather risk is already showing upIndia’s monsoon is running 15% below the long-term average, raising concerns over Kharif crops including rice, sugarcane and corn. A weaker harvest could add to food-price pressures and squeeze household budgets, while lower hydropower generation could compound the energy shock.That risk is already showing up in inflation. Retail inflation rose to 4.8% in August, its third straight month above the Reserve Bank of India’s 4% target, with higher food prices driving the increase.The pressure could be particularly acute across South Asia, where food carries a large weight in consumer price indices. The ADB expects India’s retail inflation to average 5.2% in 2026, leaving policymakers with less room to absorb another surge in food and energy prices.Growth forecasts are moving in the same directionThe ADB upgrade is part of a broader shift in expectations for India. S&P Global Ratings has raised its FY27 real GDP growth forecast to 7% from 6.6%, pointing to stronger-than-expected June-quarter growth, robust industrial activity, healthy consumption, strong goods exports and accelerating government investment.Also Read: The mood, as per Moody's: Shocks keep coming, India keeps growingS&P also expects the Reserve Bank of India to raise its policy rate by 25 basis points this fiscal year as persistent inflation, weather risks and the West Asia conflict add to price pressures.InstitutionFY27 / 2026 growth forecastPrevious forecastKey drivers / viewAsian Development Bank7.0%6.6%Strong domestic demand, investment and public infrastructure spendingS&P Global Ratings7.0%6.6%Strong June-quarter growth, industrial activity, consumption, goods exports and government investmentMoody’s Ratings7.0%6.0%Private consumption, fixed investment, public infrastructure spending, private investment and servicesWorld Economic Forum6.7%—Resilient domestic demand; strongest growth outlook among economies coveredJefferies6.5–7.0%—Resilient growth despite geopolitical and energy risks; corporate earnings growth seen at 17% next fiscalMoody’s Ratings has raised its FY27 growth forecast to 7% from 6%, citing private consumption, gross fixed capital formation, public infrastructure spending, a revival in private investment and resilient services.The World Economic Forum has similarly identified India as having the strongest growth outlook among the economies covered in its latest survey, while Jefferies sees real GDP growth of 6.5-7% in the current fiscal year and expects corporate earnings growth to accelerate to 17% next fiscal from 14%.The common thread across the forecasts is a domestic economy that continues to absorb external shocks. The question for India’s policymakers is whether that resilience can withstand a second shock coming from the weather — and whether higher food and energy prices eventually start eating into the very consumption strength that is keeping growth aloft.