The Monetary Policy Committee (MPC) presciently stuck to the status quo on policy rates and stance in its first meeting for FY27, as heightened geopolitical uncertainty clouded visibility around India’s macroeconomic outcomes. The Committee expectedly resorted to cautious commentary, stressing upside and downside risks to the outlook for inflation and growth, respectively, in contrast with typical statements where risks are balanced around both.
While a temporary ceasefire has been announced between the US and Iran, the situation in West Asia remains unnervingly volatile. Even if hindsight shows that the crisis has ended, energy prices are unlikely to rapidly revert to pre-conflict levels immediately, with the reports of damage to energy infrastructure, which may also continue to constrain availability. With persisting uncertainty on all these factors, projecting macroeconomic outcomes precisely for India for FY27 is a challenging task.
Assuming an average Brent price of $85/barrel in FY27 and a normal monsoon, the MPC has estimated India’s CPI inflation and GDP growth at 4.6 per cent and 6.9 per cent, respectively, in the fiscal. This marks a worsening relative to FY26, when CPI inflation is estimated to have averaged at a much more sedate 2.1 per cent and GDP growth is forecast at a healthy 7.5 per cent, as per ICRA’s projections. Moderating growth along with hardening inflation complicates policy choices for the central bank.
The Committee’s CPI inflation projection exceeds our forecast of 4.3 per cent for the fiscal, even as we broadly concur with the core CPI estimate of 4.4 per cent for FY2027. However, a potential El Nino would hold negative implications on agriculture output and food prices, even as the current ample reservoir storage provides some near-term respite.
Growth outlook sanguine
On the GDP front, the MPC’s growth forecast is more sanguine than our estimate of 6.5 per cent for the fiscal. Notwithstanding the favourable base, the MPC’s estimate for GDP growth in Q1 FY27, at 6.8 per cent, seems particularly strong, given that the adverse impact of the crisis is likely to be concentrated in this quarter.
Given the current flux, these projections are admittedly subject to large changes. For instance, an average oil price that is $20 higher than our baseline estimate of $85/barrel (along with constrained energy availability) could worsen GDP growth to sub-6 per cent. Concurrently, it would raise CPI inflation by at least 30-40 bps, even if we assume limited pass-through to fuel prices, while adversely impacting the government’s fiscal metrics. Further, it would widen the current account deficit (CAD)-to-GDP ratio by 70 bps in the fiscal.
Given the extent of the volatility that the global economy has witnessed between the February 2026 and April 2026 MPC reviews, monetary policy may need to continue to adopt a cautious and wait-and-watch approach in the near term. Nevertheless, given the expected uptick in inflation, and the sizeable upside risks to the inflation trajectory, another rate cut can certainly be ruled out for the current easing cycle.
In fact, the next move is likely to be a hike, although the timing of the same remains quite uncertain at present, and would depend on geopolitical developments and energy price movements, and their transmission to India’s growth-inflation dynamics.
Yield swings
Following the ceasefire, the yields on the benchmark 10-year Government of India security (G-sec) has corrected sharply to 6.92 per cent intraday, after having crossed 20-month high of 7.1 per cent in early-April 2026. Yet, the 10-year yield remains well above the 6.66 per cent seen at end-February 2026, before the crisis began.
The risks of a fiscal slippage against the budgeted 4.3 per cent of GDP for FY2027 remain, owing to lower excise duty and corporate tax collections, and dividend payouts by Oil Marketing Companies (OMCs), as well as a higher subsidy burden, despite some buffer provided by the Economic Stabilisation Fund (ESF), which would continue to put pressure on yields.
Likewise, while the INR has appreciated from the recent all-time low, downside risks to the USD/INR pair persist, as higher oil prices could manifest into a worsening in the balance of payments position. Tightening financial conditions could hurt growth, in addition to high energy prices, even if policy rates remain unchanged.
The writer is Chief Economist, Head- Research & Outreach, ICRA
Published on April 10, 2026