Twin shocks of energy crisis and deficient rainfall will lead to the real GDP growth falling to 6% in FY27 from 7.4% in FY26, a foreign brokerage said on Monday.

The shocks will also stoke inflation, and may prod the Reserve Bank to hike key lending rates twice in the current fiscal, HSBC said in a report.

“Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6% in FY27, lower than our previous year’s forecast of 7.4%,” the report said.

It warned that the emerging crises will be a major blow to the formal sector, including rural households and small firms.

The Reserve Bank expects GDP growth to come in at 6.9% for 2026-27, as per an estimate released last month.

The conflict in West Asia has led to a sharp surge in oil prices with crude continuing to trade above $100 per barrel.

HSBC economists argued that the twin crises and deficient rainfall due to El Nino warrants a closer attention on the FY27 outlook, and added that higher temperatures will also dent activity.

“Our model suggests the El Nino/temperature channel can add 0.5 percentage point to inflation over a year,” it said, pegging the headline inflation to come at 5.6% in FY27.

It, however, said that there will be at least two quarters where the headline inflation number is likely to shoot beyond the 6% mark, which is the upper tolerance of the central bank.

The RBI is likely to deliver rate hikes in the December and March quarters as it sees the possibility of an increase in the inflation, it said, adding that there will not be any action at the upcoming policy in early June.

The brokerage said it has accounted for up to ₹7 hike per litre on petrol and diesel prices to address the pain of oil marketers, who are reportedly suffering losses of up to ₹30,000 crore per year. If the hikes do not happen, the average inflation for FY27 will come at 5.3%, it said.

It argued that temperatures have become far better than rainfall in explaining and forecasting food inflation on factors such as improvements in irrigation.

“We find that the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Niño years is rising,” it noted.

The brokerage said that tracking surface temperature is enough to get a good sense of where food inflation is headed and added that one may not even want to track rains in most parts.

Citing the past instances, it explained that an El Nino year is associated with low rains, high temperatures, higher food inflation, and lower growth.