India’s industrial sector posted solid gains in the second quarter of FY27, supported by manufacturing and credit growth. However, rising fiscal pressures and a cooling trend in private consumption pose challenges for the second half of the year. Investors are also tracking the impact of $13.6 billion in foreign equity outflows and the Reserve Bank’s stance on interest rates.
The Indian economy concluded the second quarter of fiscal 2027 with strong industrial momentum, though the outlook for the second half of the year is becoming more complex. Manufacturing activity and credit growth remained the primary engines of this expansion. Data on industrial production and factory activity showed consistent growth, while September saw record automobile retail sales, suggesting that the industrial sector is operating on a firm footing.
Despite this industrial strength, signs of cooling in consumer demand are appearing. While festive season spending has provided a short-term boost, the overall picture for private consumption is shifting. The boost previously provided by changes in the Goods and Services Tax (GST) structure is fading, making year-on-year growth comparisons more difficult. Additionally, data indicates a moderation in growth rates for digital payments through the Unified Payments Interface (UPI). Rural demand, a critical part of the domestic economy, has also been affected by uneven monsoon rainfall, while higher interest rates continue to add pressure on household spending.
Fiscal health remains another area where the government faces a balancing act. While direct tax collections have performed well, with corporate tax receipts rising by nearly 20%, indirect tax performance has lagged. At the same time, the government is dealing with increased spending on food and fertilizer subsidies. These factors have led to a widening of the fiscal deficit in the first five months of the fiscal year. Keeping the total deficit within the government’s full-year targets will be a significant challenge as the year progresses.
The external environment also remains difficult for Indian markets. Foreign institutional investors have been cautious, withdrawing a net total of $13.6 billion from Indian equities during the first half of the fiscal year. This trend has been largely influenced by rising bond yields in international markets. Meanwhile, the Reserve Bank of India is focused on controlling inflation.
The central bank’s Monetary Policy Committee has adopted a stance of calibrated tightening. This means the bank is carefully adjusting its policy to ensure inflation stays in check, with market participants expecting further interest rate hikes to maintain positive real interest rates into 2028. For investors, the key monitorables for the remainder of the year will be the government’s ability to meet fiscal deficit targets, the speed of rural recovery, and the trajectory of inflation, which will dictate the central bank's future policy moves.