RBI confident about GDP growth

Yes, the central bank scaled down the growth figure by 0.7 per cent to 6.9 per cent this year (2026-27) due to the ongoing Iran war, and related implications. Yet, there is a feeling among experts that this exudes a certain confidence in the economy’s ability to bounce back soon. This is evident in the statement by the Reserve Bank of India’s governor. “Further escalation and wider spread of the conflict, heightened volatility in global financial markets, and weather-related events, however, weigh on the domestic growth outlook. Risks to the baseline projections are tilted to the downside, with uncertainty remaining elevated due to the ongoing West Asia conflict,” he said.

Let us look at the issues that indicate that the central bank thinks that India has the inherent macro strengths to combat the repercussions. The RBI’s estimates are more optimistic than those by global institutions. In its Monetary Policy Report (April 2026), which collates predictions from several sources, India will grow at 6.4 per cent in 2026, and similarly in 2027. Of course, these are the numbers for the calendar year (January-December) unlike the RBI’s ones for the financial year (April-March). But even an apple-to-apple comparison shows that the latter’s estimates for 2026 (calendar year) remain higher at seven per cent.

One needs to consider the quarterly estimates in 2026-27. The lowest number is 6.7 per cent in Q2-27 (July-September 2026), which is the same as in Q1-26 (April-June 2025), which was substantially lowered as per the new data series. Despite the war clouds, and disruptions, the RBI feels that the drop in growth will be akin to what happened a year ago. More importantly, the growth is likely to bounce back substantially by 0.5 per cent by Q4-27 (January-March 2027). Hence, the impact of the war will not last beyond three quarters, since the figure for Q4-26 (January-March 2026) was a robust 7.5 per cent.

In addition, as the RBI Governor said, there are major downside risks to growth. Although the baseline assumptions, or the most expected ones, point at 6.9 per cent annual growth in 2026-27, the “risks (are) tilted towards the downside around this baseline path.” The Monetary Policy states, “Assuming a normal monsoon, and no major exogenous or policy shocks, structural model forecasts for 2027-28 indicate real GDP growth at 6.6 per cent,” or lower than the previous year’s 6.9 per cent, and substantially lower after a Q4-27 expectation of 7.2 per cent. However, things can turn out to be worse if the downsides persist.

“Under the scenario of higher crude oil prices than the baseline, real growth is projected at 6.7 per cent (not 6.9 per cent) and 6.4 per cent (not 6.6 per cent) for 2026-27 and 2027-28, respectively,” states the Monetary Policy. The downside spillovers emanate from “prolonged geopolitical conflict, volatility in global financial markets, shifting trade patterns, and climate-related shocks.” Indeed, there are some upsides, although their chances are lower than the baseline, or downsides. “At the current juncture, the situation is highly uncertain, and would require continuous assessment of the developments,” states the report.

On the inflation front, manufacturing firms expect a rise in the costs of raw materials in the first quarter of this financial year, which may be compensated by a simultaneous increase in the selling prices of finished products. “Services and infrastructure firms anticipate rising input cost pressures but lower growth in selling prices,” which will put more burden on them. Thus, there will be a sector-specific mismatch as manufacturing may be able to handle the issues more efficiently. Consumer Confidence Surveys point at higher prices.

The most-expected consumer inflation is expected to be 4.6 per cent in 2026-27, with the highest level of 5.2 per cent in Q3-27 (October-December 2026). The annual figure will be the same in 2027-28, if there is a normal monsoon, minus “further exogenous or policy shocks.” But there are upsides, as in higher inflation, with a potential for it to be five per cent in 2026-27, and 5.1 per cent in 2027-28. These are based on the assumptions of higher global crude prices compared to the baseline, or most-expected predictions, and will stem from a longer conflict.

“The baseline forecasts (4.6 per cent) are subject to several upside (higher) and downside risks. The upside risks emanate from supply disruptions caused by weather-related shocks, and elevated energy prices due to prolonged geopolitical conflicts. The downward (lower) risk could emanate from an early resolution of geopolitical conflict,” states the Monetary Policy Report. If the consumers and business community sense a higher-than-expected rise, there may be sentiment-driven momentum that can inflate the prices further. Since price rise has emotional links, the upside risks are more qualitative and subjective.

Some experts contend that high inflation, if retained under the five per cent mark, or nearer to four per cent, may be beneficial. It will boost nominal growth (real growth plus inflation), which was under pressure due to extremely low inflation. High nominal growth, in the range of 10-11 per cent, provides more fiscal space for the policy-makers to keep the fiscal deficit, as a percentage of nominal GDP, under check, even as they loosen the purses for higher expenditure. In 2025-26, low nominal growth forced the finance ministry to squeeze the budgets of several ministries, and on account of several welfare measures.

According to the RBI, there are several unrelated factors, i.e., not directly related to the ongoing war, that can disrupt the growth figures. One of these includes the “possibility of a sharp correction in AI-related asset valuations if corporate earnings fail to justify elevated technology stock valuations. Such a correction could trigger a tightening of financial conditions, concentrated in tech-heavy regions but with potential broader contagion effects,” warns the monetary policy report. Valuations are currently under pressure due to the fast-changing AI-related tech, and emergence of new tools. There are fears that AI-linked productivity and other gains may not materialise easily.

In conclusion, the RBI is gung-ho. “Domestic economic activity remains resilient, supported by robust private consumption, and continued expansion in fixed investment, even as the external environment remains uncertain. Favourable agricultural prospects, steady services activity, elevated capacity utilisation, and healthy balance sheets of corporates and banks are likely to underpin growth going forward. Continued public investment in infrastructure, and recently concluded trade agreements are also expected to be conducive for medium-term growth prospects,” states the monetary report. Yet, the risks to the outlook persist, and the growth-inflation dynamics can change.