The Reserve Bank of India’s (RBI) projections for growth and inflation suggest that the Indian economy, thanks to the war in West Asia, has gone from a Goldilocks — low-inflation and high-growth — environment towards potential stagflation — high-inflation and low-growth.
RBI now expects the Indian economy to grow at 6.9% in 2026-27 with risks tilted to the downside. In the current GDP series, which has annual GDP growth data till 2023-24, this is the lowest and the first sub-7% growth. Inflation projection for 2026-27 now stands at 4.6% and inflation risks for 2026-27, according to RBI, are tilted to the upside.
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With the situation still fluid — it remains to be seen whether the two-week ceasefire in the US-Israel war on Iran announced early Wednesday morning holds and how long does it take to normalise production and shipping of oil and gas from West Asia — RBI has chosen to wait and watch rather than make tangible changes to the key policy tools at its disposal. Its April Monetary Policy Committee (MPC) meeting, which ended on Wednesday, decided to leave the policy rate and monetary policy stance unchanged at 5.25% and neutral. And the signalling which could have been seen in changes in RBI’s annual growth and inflation forecasts is missing because the February MPC meeting postponed releasing full-year forecasts for 2026-27 before the government released growth and inflation data under the new series. RBI’s Monetary Policy Report issued on Wednesday, projects a 6.6% GDP growth for 2027-28 assuming crude oil at $75/barrel.
World Bank’s South Asia Regional Outlook released on Wednesday projects a GDP growth of 6.6% and 7% for India in 2026-27 and 2027-28.
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“RBI kept repo rate and stance unchanged, and the tone of statement was very balanced…While the statement exudes calm and assurance by alluding to India’s better macro fundamentals before this crisis, it is also bringing in the realism that there are now downside risks to growth forecasts and upside risks to inflation forecasts. Heightened uncertainty during a supply side shock has made the MPC to be on a “wait and watch” mode as the temporary ceasefire in the middle east conflict offers the opportunity to assess the balance of risks”, Samiran Chakraborty, Chief India Economist, Citibank said in a note.
While MPC did not give tangible estimates of the war’s disruptive impact on the economy, it did flag possible channels through which the adverse effects will be felt.
“First, elevated crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output. Third, heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment. Fourth, weaker global growth prospects may dampen external demand and reduce remittance flows. Finally, adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing. Overall, the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed”, RBI Governor Sanjay Malhotra said in his written statement issued after the meeting.
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To be sure, RBI also underlined the fact that Indian economy can deal with these disruptions. “The fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past. The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook”, the MPC resolution said, justifying its wait and watch approach on the policy front.
Experts believe that future conditions, especially the price of crude oil , would be critical in whether or not RBI increases interest rates going forward.
“Looking ahead, we think that if the energy shock lingers, it could weigh more on growth than on inflation, looking more like the pandemic than the 2022 oil price shock. We believe the RBI can focus on keeping inflation within the 2–6% band rather than strictly at 4%. Our assessment suggests that if oil averages below US$100pb, inflation should stay under 6% (assuming normal rains or a moderate El Niño). If oil averages above US$100bb, inflation would likely breach 6% and could prompt rate hikes – though that isn’t our base case”, Pranjul Bhandari, Chief India Economist, HSBC said in a note.
Brent crude price fell by16% to reach around $92 per barrel on Wednesday after a two-week ceasefire was announced.
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The war’s disruption on the Indian economy has also diverted RBI’s attention and intervention outside the typical growth-inflation dynamic which is the mainstay of India’s monetary policy under the inflation targeting framework. Exchange rate management has emerged as one of the most important challenges on this front.
The Governor’s statement acknowledged the situation and assured markets that its recent interventions in the currency markets ought to be seen as attempts to manage volatility rather than completely undermining market determined dynamics.
“Specifically, intervention in the foreign exchange market is aimed at smoothening excessive and disruptive volatility without targeting any specific level or band for the exchange rate. This is consistent with our long-standing policy of the exchange rates being market determined. RBI stands committed to this policy and would judiciously contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals”, the Governor’s statement said. The rupee has lost nearly 2% of its value against the US dollar since the West Asia war began, but gained 0.5% on Wednesday to close at 92.59 to the dollar.
