The Reserve Bank of India is widely expected to maintain the repo rate at 5.25% in its June review, as policymakers navigate the pressures of slowing growth and sticky retail inflation. The central bank held the rate unchanged at 5.25% in April and had projected FY27 growth at 6.9% before the West Asia conflict escalated. As per India Ratings and Research, the premise for maintaining status quo in key policy rates is that even though there is an upward trajectory in CPI, it is still expecting or projecting the CPI to remain within the RBI tolerance band of less than 6 per cent. The RBI noted on April 8 that risks to the baseline projections are tilted to the downside, with uncertainty remaining elevated due to the ongoing West Asia conflict.
Two major rating agencies have significantly revised India's FY27 growth projections downward due to the West Asia war's impact on crude oil prices. Icra lowered its GDP forecast to 6.2% from 6.5%, while India Ratings projects GDP growth at 6.7%, down sharply from its earlier projection of 7.6%. The government's own target of 7-7.4% growth now appears out of reach. Icra assumes crude oil prices to average at $95 a barrel in the current financial year, above its earlier estimate of $85 a barrel, given the stickiness in price amid the stalemate in West Asia. A $10 per barrel increase in crude oil prices could reduce GDP growth by 44 basis points, while a 10% reduction in capex could lower GDP growth to 6.0%, according to Megha Arora, director – Economics at India Ratings.
The West Asia conflict is driving crude oil prices to uncomfortable levels, with Icra assuming prices could average $120 a barrel, which could drag India's growth to 5.6%. India Ratings projects crude oil prices may average $110 a barrel in the first quarter and progressively come down to $80 by the fourth quarter of this fiscal. This energy price spiral is forcing fuel price hikes, with retail prices of petrol and diesel expected to go up by ₹5 a litre in the June quarter, including the increase implemented on May 15, and ₹4 a litre each in the subsequent two quarters. The agency assumes average crude oil prices at $95 per barrel during FY27, with prices averaging $110 per barrel in the first quarter before easing gradually through the year.
India Ratings projected the trade deficit at around 10.4% of GDP, which it said would be the highest in the past 10 years, driven by elevated crude prices, currency depreciation, and higher imports of fuel, electronics, gold, and silver. The rupee was expected to depreciate by around 6-7% on average during FY27, with India Ratings now projecting the rupee to average 94.28 to the dollar in the current financial year, depreciating 6.7% annually. The agency assumes rainfall is likely to be 92% of the long-period average, leading to the gross value added (GVA) of agriculture to increase by 2.1% in FY27. The depreciated currency from weak capital inflows, weaker-than-expected capex especially by the government to reduce fiscal risks, and weak global trade growth are among the major headwinds facing the economy.
Private investment activity could remain subdued as companies adopt a 'watchful mode' amid slowing export demand, elevated domestic inflation, and uncertainty over consumer spending. Sectors dependent on crude oil derivatives were likely to face greater pressure, while services segments such as data centres and global capability centres could provide some support. The 10-year government security yield was likely to remain above 7% amid concerns over fiscal deficit levels. The energy price spiral is complicating the situation for a weakening rupee, sluggish government capital expenditure, subdued industrial output, and the threat of El Niño disrupting agriculture from mid-2026, which are also affecting the government's own growth target.
