Yet the central bank’s message is far from pessimistic. While acknowledging that external shocks are making the economic environment more difficult, the RBI believes India’s domestic fundamentals remain strong enough to cushion the blow.
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A less comfortable economic outlook
The clearest indication that the Goldilocks phase is beginning to dim comes from the RBI revising the inflation forecast up and the growth forecast down. The central bank has lowered its FY27 real GDP growth projection to 6.6 per cent from 6.9 per cent earlier. At the same time, it has increased its inflation forecast to 5.1 per cent from 4.6 per cent. This is the second downward revision to the growth outlook this year.
The shift is notable because it follows a remarkably strong FY26, when India’s economy expanded by 7.6 per cent, driven by robust private consumption and fixed investment, with manufacturing and services providing much of the momentum. Inflation, meanwhile, remained exceptionally benign. Headline consumer price inflation stood at just 3.4 per cent in March and 3.5 per cent in April, comfortably below the RBI’s 4 per cent target.
That favourable combination is now under pressure. The RBI expects inflation to rise through the year, reaching 5.9 per cent in the third quarter before moderating slightly. Growth is expected to remain positive but slower, with quarterly GDP expansion projected at 6.6 per cent in the first quarter, 6.3 per cent in the second quarter, 6.5 per cent in the third quarter and 6.8 per cent in the fourth quarter.
In short, the RBI now expects exactly the opposite direction of travel from the one India enjoyed during its recent Goldilocks phase.
A shadow falls on the macro picture
The principal reason for this deterioration lies beyond India’s borders. The RBI repeatedly identifies the prolonged West Asia conflict as the biggest threat to the economic outlook. The RBI notes that the global environment has deteriorated since its April policy review, with continued disruptions to key trade routes and supply chains, increased market volatility and rising energy prices. International crude oil prices averaged around $110 per barrel during April and May, substantially higher than the assumptions used in the previous policy review. Those higher prices are now beginning to pass through into the domestic economy. Retail fuel prices have already been increased since May, with petrol prices rising by 7.4 per cent and diesel prices by 8.4 per cent. According to the MPC, this increase alone could directly add around 36 basis points to headline inflation. The RBI is also seeing price increases in commercial LPG, chemicals, industrial raw materials, rubber, plastics and several other inputs used across industries.
The concern extends beyond fuel. The MPC observed that import diversification in affected commodities may help improve supplies but comes at a higher cost. The ultimate impact, it noted, will depend on the duration of the conflict, the pace at which supply chains normalise and how the burden of higher costs is shared among stakeholders. That combination of higher energy costs, supply disruptions and rising input prices explains why the RBI has become simultaneously more worried about inflation and less optimistic about growth.
Inflation risks beyond oil
The RBI’s inflation concerns go beyond the immediate impact of higher oil prices. Governor Malhotra warned that while underlying inflation pressures remain benign for now, there is a risk that higher costs become embedded more broadly in the economy. He cautioned that generalisation of inflation through second-round effects on expectations and wages is a distinct possibility. That concern is reflected in the RBI’s projections. Inflation is expected to rise from 4.2 per cent in the first quarter of FY27 to 5.1 per cent in the second quarter and 5.9 per cent in the third quarter before easing to 5.4 per cent in the final quarter. Core inflation is projected at 4.7 per cent for the year.
Yet the RBI’s assessment also contains an important nuance. Core inflation remained stable at 3.7 per cent during March and April. Excluding precious metals, core inflation was only around 2.1-2.2 per cent. The MPC explicitly noted that this suggests input-cost pressures have not yet fully translated into consumer prices and that demand-side pressures remain contained. This distinction is important because it indicates that the inflation problem is being driven primarily by external supply shocks rather than excessive domestic demand.
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Growth faces new headwinds
The same forces pushing inflation higher are also expected to weigh on growth. The RBI believes elevated energy prices and continued supply disruptions will increase production costs across sectors. Higher freight and insurance expenses are already affecting trade. Weak global demand and rising logistics costs are expected to act as headwinds for merchandise exports. The central bank also sees emerging signs of moderation in some sectors. While high-frequency indicators continue to suggest resilience, the Governor acknowledged that the impact of cost pressures is becoming increasingly visible.
The RBI specifically warned that cost escalation and heightened uncertainty could weaken investor sentiment even though investment activity remains broadly healthy. Rising inflation could also erode household purchasing power and eventually affect consumption. These risks explain why the RBI has lowered its growth forecast despite the economy’s strong performance over the past year.
The monsoon risk
Alongside geopolitical uncertainty, the RBI repeatedly highlighted weather-related risks. The RBI referred to forecasts of a deficient south-west monsoon and the possibility of El Niño conditions. A weaker-than-normal monsoon could affect agricultural output, increase food inflation and dampen rural demand, creating additional pressure on both growth and prices. The MPC specifically identified uncertainty regarding the spatial and temporal distribution of the monsoon as one of the major upside risks to inflation.
However, the RBI also pointed to several mitigating factors. It noted that programmes focused on crop diversification, water harvesting and conservation, climate-resilient agricultural practices and short-duration crops are expected to reduce the impact of adverse weather conditions. Moreover, the central bank stressed that adequate foodgrain stocks and satisfactory reservoir levels provide some comfort at a time when food inflation risks are increasing.
Why India still shows resilience
Despite acknowledging a more challenging environment, the RBI’s overall assessment remains surprisingly constructive. A key reason is the continued strength of domestic demand. The Governor noted that private consumption remains resilient and continues to be supported by discretionary spending. Looking ahead, he argued that sustained momentum in services, the continuing benefits of GST rationalisation and broadly stable employment conditions should support urban consumption even if inflation weighs somewhat on household purchasing power.
The services sector remains a particularly important source of confidence. Manufacturing and services PMIs continue to signal expansion and business expectations remain positive. Services exports have remained resilient despite global uncertainty and the RBI expects demand for Indian services to remain healthy.
This resilience in consumption and services helps explain why the central bank still expects growth above 6 per cent despite the external shocks.
Investment remains a key buffer
The RBI also sees several factors supporting investment activity. Government capital expenditure is expected to remain robust. Elevated capacity utilisation across industries suggests companies may still need to expand capacity. Sustained credit flows from both banks and non-bank lenders are providing financing support for investment. Credit from all sources grew by 15.4 per cent in FY26 compared with 12.1 per cent a year earlier. Bank credit growth remains broad-based and robust.
The RBI therefore expects investment activity to remain supportive of growth, even though higher costs and uncertainty may make businesses more cautious.
Strengthening of shock absorbers
Another important reason for the RBI’s relative optimism is its assessment of policy support. The RBI highlighted a series of government measures aimed at strengthening resilience against external shocks. These include support for MSMEs and export sectors, efforts to increase domestic gas and crude production, encouragement of domestically produced alternatives to imported inputs and diversification of critical imports.
The RBI believes these measures are helping reduce the economy’s vulnerability to external disruptions at a time when global supply chains remain fragile. In effect, policymakers are trying to use the current crisis as an opportunity to strengthen India’s long-term resilience.
Financial and external stability remain strong
The central bank also derives confidence from the strength of India’s financial and external-sector buffers. Banking system indicators related to capital adequacy, liquidity and asset quality remain healthy. Non-banking financial companies are similarly well capitalised and financially sound.
On the external front, the RBI expects services exports and inward remittances to continue providing support even if the current account comes under pressure from higher energy imports.
Foreign direct investment remains strong and the RBI noted that investor interest in India continues despite recent foreign portfolio outflows. The RBI has announced several important steps to attract more foreign capital.
India’s foreign exchange reserves stood at $682.3 billion as of May 29, 2026. According to the RBI, this is sufficient to cover about 11 months of imports and provides a substantial buffer against external shocks and currency volatility.
From Goldilocks to a test of resilience
The RBI’s June review effectively marks the transition from a Goldilocks phase to a period of greater uncertainty. Growth is expected to slow while inflation is projected to rise. Yet the central bank’s confidence stems from its belief that India entered this episode of global turbulence “with much better fundamentals than in previous similar episodes”. Strong domestic demand, resilient services exports, robust government capex, healthy bank balance sheets, adequate foodgrain stocks and foreign exchange reserves of $682.3 billion are all cited as buffers. The Goldilocks moment may be fading, but the RBI’s assessment suggests that India’s economic foundations remain strong enough to weather a more challenging global environment.