The Reserve Bank of India (RBI) is bracing for a more challenging economic environment in 2026-27 compared to the previous year, coinciding with the announcement of a two-week ceasefire between the United States and Iran earlier today.
As anticipated, the RBI’s Monetary Policy Committee (MPC) opted to maintain the policy repo rate at 5.25% during its meeting on Wednesday. The rate had previously been lowered by 125 basis points in 2025. In light of the ongoing conflict in West Asia, which has seen fluctuations in intensity, the Indian central bank has decided to remain alert, vigilantly assess new developments, and keep the option open to respond appropriately as necessary.
The RBI’s outlook is evident in its projections. The central bank predicts that GDP growth will decrease from an estimated 7.6% in 2025-26 to 6.9% in 2026-27. Although Governor Sanjay Malhotra emphasized during his address that India’s economic fundamentals are more robust than in past crises, the RBI acknowledges potential downside risks to the projected 6.9% growth for the current fiscal year. A scenario analysis conducted by RBI staff suggests that growth could dip to 6.7% in 2026-27 and 6.4% in 2027-28 if crude oil prices average $95 per barrel this fiscal year and $85 per barrel the following year.
Analysts argue that, despite revising its forecasts, the RBI retains an optimistic stance considering the magnitude of external shocks. It is essential to note that many of the central bank’s estimates were formulated prior to the ceasefire announcement. Earlier this week, Morgan Stanley, a prominent US investment bank, had already reduced its growth forecast for 2026-27 to 6.2%, which was also made before the ceasefire was established.
Regarding inflation, retail price increases are expected to reach 4.6% in 2026-27, significantly surpassing last year’s figures. Additionally, the Consumer Price Index (CPI) inflation is projected to average 5.2% in the last quarter of 2026, before tapering to 4.7% in the subsequent quarter. The RBI has indicated that inflation risks may trend upward, with a potential El Niño event posing significant concerns. Private forecaster Skymet has already predicted that rainfall in 2026 may be below normal, measuring at 94% of the long-term average.
These macroeconomic figures are merely the surface; the foundational assumptions embedded within them shed light on the RBI’s preparedness for potential challenges ahead.
The conflict in West Asia has primarily impacted global energy prices, with India’s crude oil basket price surging from an average of under $70 per barrel in February to $113 per barrel in March, and even reaching $129 per barrel in early April.
For the entirety of 2026-27, the RBI’s forecasts for growth and inflation are based on an anticipated average crude oil price of $85 per barrel, which is over 20% higher than its estimates for the latter half of 2025-26. If crude prices exceed the RBI’s baseline assumption by 10% and this increase is passed on to consumers, inflation could rise by 50 basis points, while growth could be negatively affected by 15 basis points.
The RBI expects crude oil prices to moderate to $75 per barrel in 2027-28, although this figure would still be 6% above the average of $71 per barrel projected for 2025-26.
In the context of recent developments, the ceasefire agreement temporarily boosted India’s stock markets by 4% on Wednesday. However, the overall economic landscape remains challenging, with mutual fund companies compelled to publish full-page advertisements aimed at preventing small investors from liquidating their holdings. Foreign investors have exhibited a different trend: following a mass sell-off of nearly $20 billion in Indian stocks during 2025-26, an additional $4 billion was sold in the first week of 2026-27, which has contributed to the rupee’s depreciation against the dollar, surpassing the 90, 91, 92, and reaching 95 zones in March.
Despite this, the rupee has regained some strength, trading at approximately 92.6 per dollar following the RBI’s interest rate announcement, attributed to the central bank’s recent measures against speculative trading. Nevertheless, the RBI has prepared for potential adverse scenarios, assuming an average exchange rate of 94 per dollar for 2026-27.
For a country like India, which is a net importer, the currency is likely to face continuous depreciation pressure. The RBI’s assumption of 94 per dollar is not concerning; however, if the rupee weakens by 5% more than the RBI’s prediction for 2026-27, inflation could rise by 40 basis points above the central bank’s forecast, while the depreciation of the currency could provide a boost to exports and increase GDP growth by 25 basis points.
The RBI, along with other monetary authorities, consistently emphasizes its forward-looking stance and the significance of new data in shaping its decisions. Currently, the RBI appears to be particularly data-driven, given the volatile and uncertain economic landscape. With inflation projected to remain above the medium-term target of 4% in 2026-27, discussions surrounding potential interest rate hikes are likely to arise.
According to Radhika Rao, Senior Economist at DBS Bank, any consideration for rate hikes will depend on whether rising fuel prices and a weak currency trigger noticeable second-round inflation effects. Madhavi Arora, Chief Economist at Emkay Global Financial Services, noted that while the threshold for conventional rate hikes remains elevated, the priority may shift towards financial stability rather than solely focusing on inflation, especially if the economic crisis continues.
Siddharth Upasani serves as a Deputy Associate Editor at The Indian Express, concentrating on economic data and trends. He has previously worked at Moneycontrol and Informist (formerly Cogencis). Outside of his professional responsibilities, he enjoys sports, fantasy football, and graphic novels.
