India has the potential to sustain “J-curve” gains even with a weaker rupee, as long as trade diversion becomes ingrained in robust supply chains and is backed by efficient logistics, as per a report by Emkay Global Financial Services. The report emphasizes the importance of moderate tariffs on capital goods and intermediaries, along with consistent long-term foreign direct investment, to uphold these gains over the medium term. It forecasts a 1.3% current account deficit for FY27 and predicts the USD/INR trading within an 87–95 range, with government bond yields expected to be around 6.50% and 6.25% by the end of FY26 and FY27, respectively.
The report anticipates that the FY27 Union Budget will continue the trend of “calibrated fiscal consolidation,” with a shift towards debt-to-GDP ratio as the government’s fiscal anchor. It aims to strike a balance between fiscal prudence, growth support, and reform continuity to maintain India’s macro stability in the medium term. The Reserve Bank of India (RBI) is expected to play a crucial role in balancing bond demand and supply for effective monetary transmission, particularly in light of an anticipated balance of payment deficit of $15 billion in FY27.
Emkay Global Financial Services projects open market operations worth approximately Rs 5 trillion in FY27. Despite the RBI’s significant unsterilized foreign exchange intervention impacting liquidity, the report highlights the burden of a substantial net dollar short position on both foreign exchange and fixed-income markets. It estimates additional primary liquidity injections of about Rs 1.5 trillion for the remainder of FY26. The government’s fiscal targets include a gross fiscal deficit of 4.3% of GDP, capital expenditure at around 3% of GDP, and an expected 8.2% growth in gross tax revenue.
Madhavi Arora, Chief Economist at Emkay Global Financial Services, noted, “While the macroeconomic environment poses challenges, a gradual fiscal consolidation approach is likely to persist. The government’s focus on debt-to-GDP ratio underscores its commitment to ensuring medium-term debt sustainability while fostering growth.”
