RBI Governor cautions: West Asia conflict likely to impede growth, increase imported inflation

Core inflation pressures remain muted, although supply chain dislocations and the risk of second-round effects render the future inflation trajectory uncertain, he said while unveiling the monetary policy. The central bank has kept the key Repo rate unchanged at 5.25%. “Elevated crude oil prices could increase imported inflation and widen the current account deficit,” he said.

“Going forward, elevated energy and other commodity prices, as also shocks to availability of inputs due to disruptions in the Strait of Hormuz are likely to impact growth in FY27,” he said. The Monetary policy Committee has forecast a lower growth of 6.9% for FY27 as against 7.6% in FY26.

“Growth impulses continue to be supported by robust private consumption and investment demand. However, the West Asia conflict is likely to impede growth,” Malhotra said. Higher input costs associated with increase in energy prices and international freight and insurance costs along with supply-chain disruptions that would constrain availability of key inputs for downstream sectors, will impair growth.

The Centre has taken several measures to support exports and protect supply chains. This should mitigate the adverse impact of the conflict, he said.

The RBI panel opined that the intensity and the duration of the conflict, and the resultant damage to the energy and other infrastructure add risk to the inflation and growth outlooks. However, the fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past. The economy is confronted with a supply shock. “It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. Accordingly, the MPC voted to keep the policy rate unchanged even as it remains vigilant, closely monitoring incoming information and assessing the balance of risks,” Malhotra said.

In January-February headline inflation continued to remain below target — it was 2.7% and 3.2% respectively. However, CPI inflation in FY27 is projected at a higher level of 4.6%.

“Disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output. Heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment,” the governor said.

“Weaker global growth prospects may dampen external demand and reduce remittance flows. Adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing,” he said. Overall, the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed.

The recent spikes in energy prices due to the conflict have emerged as a risk. Although retail prices of petrol and diesel have remained unchanged, the pass-through of higher global energy prices has resulted in some price increases in few other fuel items.

RBI Governor on forex intervention

Despite stronger macroeconomic fundamentals, the Indian rupee in FY26 depreciated more than the average in the previous years, Malhotra said. “Let me reiterate that our exchange rate policy remains unchanged. Specifically, intervention in the foreign exchange market is aimed at smoothening excessive and disruptive volatility without targeting any specific level or band for the exchange rate,” Malhotra said.

“This is consistent with our long-standing policy of the exchange rates being market determined,” he said. The RBI stands committed to this policy and would judiciously contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals, he said.

The central bank had last week barred banks from offshore non-deliverable derivative (NDD) contracts in the rupee.

The currency, which fell to a record low of 95.22 against the dollar recently in the wake of the West Asia conflict and capital outflows, recovered to 92.58 on Wednesday.

Forex markets witnessed heightened volatility last month. “We saw positions were being built up leading to arbitrage positions between the NDF and deliverables markets. Usually, these linkages are essential for price discovery, but in such cases where volatility is excessive, it does not help. These reactions are specific to market movements, and do not signal structural change in our approach,” Malhotra said.

“These measures have to be seen in context of this episode, which was leading to disruptive volatility. More importantly, this was leading to artificial drying up of supply in the market, which was affecting prices. So, our objective of doing this is to cool that phase down, RBI Deputy Governor T Rabi Sankar said.