The Reserve Bank of India’s (RBI) is prepared for 2026-27 to be more difficult than last year on average, even as the US and Iran reached a two-week ceasefire just hours earlier.As was widely expected, the RBI’s Monetary Policy Committee (MPC) on Wednesday left the policy repo rate unchanged at 5.25%. The repo rate was cut by 125 basis points (bps) in 2025. In the face of the West Asia war – receding on one day, escalating on another – the Indian central bank has chosen to continue to remain vigilant, closely monitor incoming information, and retain the flexibility to “respond judiciously” to that information.The first sign of what the RBI is prepared for is in its forecasts. From an estimated 7.6% in 2025-26, GDP growth is seen declining to 6.9% in 2026-27. And while Governor Sanjay Malhotra was at pains to point out in his address on Wednesday that India’s fundamentals are on a “stronger footing” now than in previous times of crisis, even the RBI thinks there are downside risks to the 6.9% growth outlook for the current year. So, growth could be even lower – in fact, a scenario analysis by RBI staff found that growth could fall to 6.7% in 2026-27 and 6.4% in 2027-28 if crude oil prices average $95/barrel in the current fiscal and $85/bbl next year.There are analysts who say that the RBI, despite pruning projections, remains optimistic given the scale of the exogenous shock. Also, it needs to be mentioned that most of these estimates by the central bank were prepared ahead of the ceasefire announcement. Earlier, on Monday, US investment bank Morgan Stanley lowered its own projection for 2026-27 to 6.2%. But that was before the two-week ceasefire was agreed to.On the inflation front, retail prices are seen rising 4.6% in 2026-27, more than twice the increase recorded last year. Further, Consumer Price Index (CPI) inflation is seen averaging 5.2% in the final three months of 2026, before easing to 4.7% in the next quarter. Risks to the inflation outlook are to the upside, the RBI said, with a possible El Niño looming large. On Tuesday, private forecaster Skymet predicted 2026 would be a below-normal year for rains at 94% of the long-period average.But these are just the headline macroeconomic numbers; the assumptions that underpin them really tell just what the RBI is prepared for.Elevated oil pricesThe economic impact of the war in West Asia has been most keenly felt in global energy prices. After averaging below $70/bbl for the seventh month in a row in February, the price of India’s crude oil basket jumped 64% in March to $113/bbl and even further to $129/bbl in the first week of April.Story continues below this adBut for 2026-27 as a whole, the RBI’s growth and inflation forecasts assume the crude oil basket price will average $85/bbl. This is over 20% higher than what it had assumed for the second half of 2025-26. And if crude oil prices are 10% higher than the RBI’s baseline assumption of $85/bbl and this increase is passed on to Indian consumers, inflation could be pushed up by 50 bps and growth adversely impacted by 15 bps.Also Read | US-Iran ceasefire: Why energy markets are not returning to normal anytime soonTo be clear, the RBI is expecting crude oil prices to cool to $75/bbl in 2027-28. But this would still be 6% higher than the 2025-26 average of $71/bbl.Continued rupee weaknessWhile the ceasefire agreement propelled India’s stock indices 4% higher on Wednesday, it has been a rather difficult time, with mutual fund houses forced to put out full-page advertisements in newspapers to keep small investors from dumping their holdings. Foreign investors, however, are a different animal: after selling almost $20 billion worth of Indian stocks in 2025-26, the first week of 2026-27 saw another $4 billion of sales. The result has been for everyone to see: the rupee fell past 90- and 91-per-dollar in December and 92, 93, 94, and 95 in March as foreign capital exited the country in droves.Since then, the rupee has gained a fair bit of ground and was trading at 92.6-per-dollar after the RBI’s interest rate decision thanks to the central bank cracking down on speculative activity against the Indian currency over the last couple of weeks. And yet, the RBI’s forecasts are ready for worse and assume the exchange rate will average 94-per-dollar in 2026-27.Story continues below this adFor a net importer country such as India, the currency will always be under pressure to depreciate. As such, the RBI’s assumption of 94-per-dollar is not problematic. But if the rupee weakens by 5% over what the RBI thinks will be the case in 2026-27, then inflation could be 40 bps higher than the central bank’s forecast, with a cheaper currency benefitting exports and pushing GDP growth higher by 25 bps.More data-dependent than before?The RBI, and all monetary authorities, make it a point to reiterate whenever they can that they are forward-looking and their decisions depend on new data. This time around, the RBI seems to be more data-dependent than usual, given how dynamic and uncertain the present and future are. But with inflation seen above the medium-term target of 4% in 2026-27, interest rate hikes have to enter the conversation at some point.For Radhika Rao, Senior Economist at DBS Bank, rate hikes would only be considered if higher fuel prices and subdued currency result in clear second-round inflation effects. And while the bar for “any conventional rate hike remains high” according to Madhavi Arora, Chief Economist at Emkay Global Financial Services, financial stability may no longer play “second fiddle” to inflation and “may well emerge as the primary focus for the RBI, if the crisis persists”.