Concerns around inflation, a weak monsoon, rising crude oil prices, and the possibility of further rate hikes have dominated discussions on India's economic outlook.
However, according to Nomura India Economist Aurodeep Nandi, the risks may not be as severe as many fear.
In a detailed conversation, Nandi explained why a poor monsoon does not automatically translate into runaway inflation, why core inflation remains subdued despite global uncertainties, and why the Reserve Bank of India (RBI) is likely to remain cautious before making any major policy moves.
He also shared his views on rural demand, fuel price pass-through, inflation expectations, economic growth, and the key indicators investors should monitor over the coming months.
Supply Shock Has Been Less Severe Than Expected
Addressing concerns over disruptions in global energy supplies, Nandi noted that the impact on oil and gas markets has been softened by major shifts in global trade flows.
China has significantly reduced its imports of oil and natural gas, while the United States has increased energy exports. Together, these changes have added substantial supplies to global markets, helping offset disruptions elsewhere.
China has also relied more heavily on alternative energy sources and coal gasification, reducing its dependence on imported gas. As a result, many emerging economies, including India, have avoided the severe energy shortages that were initially feared.
Industrial Investment Boom Supporting Growth
While geopolitical tensions and higher energy prices created concerns about a slowdown in Asia, Nandi believes the region continues to benefit from a powerful industrial investment cycle.
Recent GDP data from several Asian economies have come in stronger than expected, suggesting that investments in key sectors are helping offset the drag from higher oil and gas prices.
According to him, four major themes are driving this investment cycle:
- Artificial intelligence and digital infrastructure
- Energy and power projects
- Defence spending
- Industrial manufacturing investments
The trend is being supported by global efforts to localise supply chains and build domestic manufacturing capabilities. Nandi expects investment in these high-growth sectors to expand at a much faster pace than overall capital expenditure growth seen in recent years.
Why Emerging Markets Are Better Positioned
Higher oil prices typically create two major challenges for emerging markets - inflation and widening current account deficits.
However, Nandi pointed out that many Asian economies entered this period from a position of strength. Inflation was relatively low before energy prices started rising, and most countries in the region continue to run current account surpluses.
India, Indonesia and the Philippines remain among the few economies with current account deficits, but those deficits were relatively manageable before recent geopolitical tensions emerged.
He also highlighted that governments across the region have increasingly used fiscal measures to cushion consumers from rising fuel costs. While crude oil prices have risen sharply, only a portion of those increases has been passed on to consumers through retail fuel prices, helping contain inflationary pressures.
Currency Pressures and Capital Outflows Remain a Concern
Nandi acknowledged that India faces greater currency pressures than some of its regional peers due to both its current account position and capital outflows.
He believes policymakers may need to focus more closely on attracting capital inflows and addressing investor concerns. Improving manufacturing competitiveness, he said, could help strengthen India's external position over the long term by boosting exports and attracting additional investments.
In the near term, he suggested measures that could encourage capital inflows, including support for overseas borrowing by certain institutions and policy reforms aimed at improving India's attractiveness to foreign investors.
Earnings Gap Driving Investment Flows
One reason global investors have shifted money away from India is the stronger earnings growth being witnessed in several North Asian markets.
Countries such as South Korea, Taiwan and Japan have benefited significantly from the ongoing industrial and technology investment cycle, resulting in much stronger corporate earnings growth than India.
According to Nandi, this relative earnings advantage has encouraged investors to reallocate funds toward those markets, adding to capital outflow pressures from India.
Energy Investment Could Be a Major Growth Driver
Nandi believes India is also benefiting from the broader global investment cycle, particularly in the energy sector.
While artificial intelligence and semiconductor investments have received considerable attention, he noted that energy-related investments are significantly larger in scale. Massive spending on power generation, transmission, renewable energy and related infrastructure is creating substantial growth opportunities.
India's policy push toward expanding energy infrastructure could therefore become an important driver of investment, productivity and long-term economic growth.
RBI Likely to Focus on Secondary Inflation Effects
On monetary policy, Nandi said the RBI's current approach appears appropriate.
Rather than reacting immediately to higher oil prices, the central bank is likely to focus on whether those price increases create broader, second-round inflationary effects across the economy.
Only if elevated energy prices persist for a prolonged period and begin feeding into wider inflation expectations would a stronger policy response, including potential rate hikes, become necessary.
At present, he believes policymakers are justified in maintaining a cautious stance.
Growth Outlook Remains Resilient
Despite concerns over delayed monsoons, El Niño risks, higher fuel prices and global uncertainties, Nandi remains relatively optimistic about India's growth prospects.
He expects the economy to expand by around 6.5-6.7 per cent, arguing that the biggest risk would come from prolonged shortages of critical energy supplies rather than simply higher prices.
With energy availability remaining broadly stable and supplies continuing to reach key sectors such as fertilisers, he sees limited risk of a major slowdown in economic activity.
For now, the combination of strong domestic investment, manageable inflation pressures and ongoing infrastructure spending appears sufficient to keep India's growth momentum intact despite a challenging global backdrop.
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