The Reserve Bank of India’s growth and inflation forecasts suggest that the Indian economy, thanks to the war in West Asia, has moved from a temperate environment – low inflation and high growth – towards potential stagflation – high inflation and low growth.
The Reserve Bank of India now expects the Indian economy to grow by 6.9% in 2026-27 with risks tilted to the downside. In the current GDP series, which contains annual GDP growth data through 2023-2024, this is the lowest and first 7% growth. Inflation expectations for 2026-27 are now 4.6%, and inflation risks for 2026-27, according to the Reserve Bank of India, are skewed 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 will hold, and how long it will take for the normalization of oil and gas production and shipping from West Asia – the Reserve Bank of India has chosen to wait and watch rather than make concrete changes to the key policy tools at its disposal. The April Monetary Policy Committee (MPC) meeting, which ended on Wednesday, decided to leave the interest rate and monetary policy stance unchanged at 5.25% and neutral. The signal that could have been seen in the changes in the Reserve Bank of India’s annual growth and inflation forecasts is missing because the Monetary Policy Committee meeting in February postponed the release of the full-year forecast for 2026-27 before the government releases growth and inflation data under the new series. The monetary policy report released by the Reserve Bank of India (RBI) on Wednesday expects GDP growth of 6.6% for 2027-28 assuming a crude oil price of $75 per barrel.
The World Bank’s regional forecasts for South Asia released on Wednesday expect GDP growth of 6.6% and 7% for India in 2026-27 and 2027-28.
Read also | Reserve Bank of India keeps repo rate at 5.25% in ‘cautious balancing act’ amid war with Iran
“The Reserve Bank of India kept the repo rate and its stance unchanged and the tone of the statement was very balanced…While the statement exudes calm and reassurance by pointing out India’s better macro fundamentals before this crisis, it also brings realism that there are now downside risks to the growth outlook and upside risks to the inflation outlook. The rising uncertainty during the supply-side shock has put the MPC in a ‘wait and watch’ mode as the temporary ceasefire in the Middle East conflict provides the opportunity to assess the balance,” said Samiran Chakraborty, Senior Director, Samiran Chakraborty. Economists in India at Citibank, in a note: “of risks.”
Although the Monetary Policy Committee did not provide concrete estimates of the devastating impact of the war on the economy, it pointed to potential channels through which the negative effects could be felt.
“First, higher crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy, fertilizer and other commodity markets could negatively impact industry, agriculture and services, reducing domestic output. Third, heightened uncertainty, increased risk aversion and safe haven demand could affect domestic liquidity conditions, economic activity, consumption and investment. Fourth, weak global growth prospects could dampen external demand and reduce remittance flows. Finally, negative spillovers from global financial markets could lead to Tightening domestic financial conditions and raising costs “In general, the initial supply shock could turn into a demand shock in the medium term if the recovery of supply chains is delayed,” Reserve Bank of India Governor Sanjay Malhotra said in his written statement issued after the meeting.
Read also | India welcomes the ceasefire in West Asia and hopes that it will strengthen peace efforts in Ukraine
To be sure, the Reserve Bank of India has also emphasized the fact that the Indian economy is capable of handling these disruptions. “The fundamentals of the Indian economy are in a stronger position, providing it with greater resilience to shocks now than in the past. The economy is facing a supply shock. It is prudent to wait and monitor changing conditions and evolving growth and inflation expectations,” the MPC decision said, justifying its wait-and-see approach on the policy front.
Experts believe that future conditions, especially crude oil prices, will be crucial in whether the RBI increases interest rates or not in the future.
“Looking ahead, we believe that if the energy shock persists, it may impact growth more than inflation, and look more like a pandemic than an oil price shock in 2022. We believe the RBI can focus on keeping inflation within the 2-6% range rather than just 4%. Our assessment is that if oil averages below $100, inflation should remain below 6% (assuming normal rains or a moderate El Niño). “If the interest rate is at $100 billion, inflation is likely to exceed 6% and could lead to higher interest rates – although this is not our base case,” Pranjul Bhandari, chief economist for India at HSBC, said in a note.
The price of Brent crude fell 16% to about $92 a barrel on Wednesday after a two-week ceasefire was announced.
Read also | India is rolling back some restrictions on liquefied petroleum gas, allocating more gas to fertilizer plants
The imbalances affecting the Indian economy as a result of the war also diverted the attention and interventions of the Reserve Bank of India outside the typical growth and inflation dynamics that constitute the mainstay of monetary policy in India within the framework of inflation targeting. Exchange rate management has emerged as one of the most important challenges on this front.
The governor’s statement acknowledged the situation and assured the markets that his recent interventions in currency markets should be viewed as attempts to manage volatility rather than undermining the entire set market dynamics.
“Specifically, intervention in the foreign exchange market aims to mitigate excessive and disruptive volatility without targeting any specific level or range of the exchange rate. This is consistent with our long-standing policy of fixing market exchange rates. The RBI is committed to this policy and will prudently contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is justified by fundamentals,” the governor’s statement said. The rupee has lost nearly 2% of its value against the US dollar since the start of the West Asian war, but rose 0.5% on Wednesday to close at 92.59 to the dollar.
